Consolidating your debt in South Africa

Debt consolidation is a strategy used to manage multiple debts.

In broad terms, it involves combining several debts into one, simplifying the repayment process, and helping you take the first step towards financial freedom.

Benefits of consolidating debt

Depending on how you consolidate your debt, the advantages may include drawing up a clear repayment plan, paying less interest, enjoying better cash flow, and reducing your monthly debt obligations.

Debt consolidation can also significantly reduce the stress and anxiety associated with juggling many creditors, helping to restore your peace of mind.

Additionally, it can help improve your credit score over time, particularly if it has been impaired due to missed payments.

How to consolidate your debt in South Africa

There are two distinct ways to consolidate your debt.

The first is to combine your debts by taking out a debt consolidation loan.

You can use this loan to pay off multiple debts to all your credit providers, so you’ll have only one monthly repayment for the new loan.

The second is to consolidate your debt through debt counselling, a formal solution for anyone who is overindebted.

Debt counselling, introduced through the National Credit Act (NCA), simplifies your finances by combining many debts into a single monthly payment, usually at a lower interest rate. It doesn’t involve taking out a new loan.

A qualified debt expert creates a restructured repayment plan for you by negotiating with your creditors, ensuring you pay a manageable monthly amount for the duration of the process. This frees up cash, giving you some room to breathe.

Debt consolidation can provide significant relief if you struggle to pay numerous debts. It can be a vital step towards financial stability.

Here’s how to know which debt consolidation option is right for you.

Look at your financial situation

Before taking steps to consolidate your debts, assess your current financial situation:

• Add up all your debts – such as credit cards, personal loans, and store accounts – so you know the total amount owing.
• Check your income and expenses to understand how much you earn and spend, and what you can realistically put towards debt repayment every month.

This will help you decide if debt consolidation is the right choice for you.

If debt consolidation isn’t the right fit, there are other ways to manage your debt in South Africa. These include negotiating directly with your creditors for lower payments or extended terms, or drawing up a realistic budget to help you pay off your debts systematically.

Consider secured loans

Another option for managing your debt is to use a secured loan, such as an access bond or second bond, to pay off your debts.

If you own a property, or have partly paid one off, you can borrow money against the value of your home, putting up your house as security. For example, if you own a home worth R500,000 and you’ve paid off R300,000, you can borrow money against the R300,000 equity you have in the home.

This kind of loan usually has a lower interest rate – but you risk losing your house if you can’t pay.

Explore debt consolidation options

Once you understand how much you earn and owe, you can look at ways to combine your debts.

As stated above, you can use a debt consolidation loan from a bank or lender to pay off all your debts at once, so you have only one repayment to make every month.

Compare the interest rates offered, and fees charged, by different lenders to find the most suitable option.

Understand how debt counselling can help

If you’re overwhelmed by debt and can’t repay it, consolidating your debt through debt counselling is a good option.

Debt counsellors – such as those at DebtBusters – offer professional guidance and can negotiate with creditors on your behalf to restructure your debt. This means your creditors won’t be able to take legal action against you.

Your debt counsellor can create a manageable debt repayment plan, with several benefits:

• It can reduce the amount you have to pay each month, thanks to a lower interest rate.
• It can give you some breathing space, since your repayments will be spread over a longer period.

Debt counselling is a legal process, so you can only exit once you’ve paid your debt in full (excluding home loans) and received a clearance certificate.

Factors to consider before consolidating your debt

Debt consolidation can help you manage and reduce your debt, but you should consider several factors before you decide which debt consolidation solution is right for you. These factors include:

Interest rates and fees

Different consolidation options come with varying interest rates and fees – it’s essential to compare these costs.

The interest rate on a debt consolidation loan may be higher than that on your original debts, or your repayment term may be longer, meaning you’ll have to pay more interest over time.

If you opt for a debt consolidation loan, compare costs from different lenders, and opt for a lower-interest loan.

If you consolidate your debt through debt counselling – a legal option only available if you’re genuinely overindebted – the debt counsellor can usually negotiate a lower interest rate with your creditors, saving you money in the long run.

Terms and conditions

It’s vital that you understand the terms and conditions of the consolidation option you’re considering, including the length of the repayment period.

In general, the repayment period for a debt consolidation loan can range from one to six years, depending on the lender and loan amount. Bear in mind that an extended repayment period may reduce your monthly payments, but can result in higher total interest paid over the life of the loan.

The average debt counselling period is typically around three to five years, depending on the total amount owed, and your affordability.

Other terms and conditions that may influence your decisions include:

• Debt consolidation loans may come with extra fees or penalties for late payments.
• Some loans may have clauses that allow the lender to increase the interest rate or call the loan due.
• You’re not allowed to take on any new credit while under debt counselling, and you can only exit the legal process once you’ve settled your debt (excluding home loans) and obtained a clearance certificate.

It’s essential that you read and understand all terms and conditions before committing.

Impact on your credit score

Debt consolidation may affect your credit score.

If you apply for a debt consolidation loan, your credit score will likely drop initially due to the “hard enquiry” (or credit report check) made by your lender as part of the approval process.

However, paying on time every month will help you improve your score over time. Having fewer debts and using less credit will also help to increase your score, provided you manage your loan responsibly.

There is no notification on your credit bureau record if you consolidate your debt by means of a loan.

If you enter debt counselling, there is a chance that you already have an impaired credit record due to missed repayments. If this is the case, the restructured process will help you pay off your debt and, if you pay consistently, you can repair your credit score over time.

However, the mere fact that you’re going under debt counselling can’t have a negative effect on your credit score.

Managing your finances following consolidation

Consolidating your debt is a big step, but it’s an important process if you’re aiming for debt freedom.

Unfortunately, some people consolidate their debt only to fail to stay in control of their finances in the longer term, which means they may end up where they started – in debt.

This is why learning how to manage your money and maintain your newly gained financial stability is crucial.

Here are some tips to help you move forward with confidence.

Create a budget 

After consolidating your debts, the first and most important step is to create a comprehensive budget.

Take the following steps to budget sensibly:

• Know your income – list all sources of income, including your monthly salary, grants, pension, side hustles, and so on.
• Work out your net income (take-home pay) with JustMoney’s salary tax calculator.
• List fixed expenses (such as your home loan, rental, utility bills, school fees, insurance, and debt repayments).
• List variable expenses (such as groceries, electricity, fuel, and entertainment).
• Categorise “needs” versus “wants” – needs include food, transport, and school fees, while wants include take-away meals, streaming services, or entertainment subscriptions.
• Set spending limits per category.
• Include a fund for savings and emergencies, so you have a safety net for unexpected costs.
• Review your budget weekly or monthly, to see if you’re within your spending limits.
• It may help you to use budgeting tools or apps to track your spending in real time and adjust as needed.

Sticking to a budget requires discipline, but it’s essential to avoid accumulating new debt and ensure your financial stability.

Avoid future debt

To stay out of debt, you must develop good financial habits.

This doesn’t mean you’ll never get into debt – after all, life happens – but it won’t be the result of unwise money behaviours.

Good financial habits include:

• Living within your means – not spending more than you earn.
• Learning to distinguish between wants and needs.
• Removing yourself from environments where you’re tempted to make impulse purchases.
• Avoiding accumulating high-interest debt, such as credit card balances. If you use credit cards, pay off the full balance every month to avoid interest charges.

Being disciplined and mindful of your finances ensures long-term financial stability and reduces anxiety and stress.

Legal aspects of debt consolidation in South Africa

It’s important to understand the legal aspects of consolidating your debt.

Debt consolidation through a loan won’t be flagged on your credit record, and your creditors can take legal action against you if you default on loan repayment.

Debt counselling, a legal process, is flagged on your credit record. You can’t apply for new credit while under debt counselling, and you can only exit the process once you’ve settled all your debt (excluding home loans) and obtained a clearance certificate.

However, creditors can’t take legal action against you if you’re under debt review (another term for debt counselling).

Understanding the laws and regulations surrounding debt consolidation can help you make informed decisions and ensure that your actions comply with the law.

Understanding South African debt laws

Before consolidating your debt, make sure you understand the laws that protect you as a consumer in South Africa.

Knowing your rights protects you, helps you manage your debt more responsibly, and prevents you from falling victim to unfair or illegal lending practices.

The National Credit Act (NCA) is the main law that governs how credit is granted and managed in South Africa. Among other things, it aims to protect consumers from reckless lending. It requires all credit providers, including banks, to assess whether you can afford a loan before approving it.

If you take out a debt consolidation loan, make sure the lender is a registered credit provider, accredited with the National Credit Regulator (NCR). The NCR oversees credit providers, debt counsellors, and credit bureaus to ensure they comply with legislation. If you’re treated unfairly by these service providers, you can report them to the NCR.

The NCA introduced debt counselling as a debt relief measure for overindebted consumers struggling to repay their debts.

Key protections under the NCA include:

• Creditors must conduct an affordability assessment before granting you credit.
• You must be given clear information about any loan or credit agreement before you sign.
• You can apply for debt counselling if you’re overindebted.
• Creditors may not contact you once you’re under debt counselling.
• Prescribed debts (older than three years with no activity) can’t be collected unless you’ve acknowledged them.
• You can lodge complaints with the NCR if you believe your rights have been violated.

Consolidate your debt with DebtBusters

When you consolidate your debt with DebtBusters, you have the advantage of one simple monthly payment that fits your budget. You no longer have to juggle different payments and due dates.

Contact DebtBusters today and find out how we can help you pave the way to a brighter financial future with our effective debt consolidation solutions.

FAQs

What is the best way to consolidate debt in South Africa?

It depends on your situation. Some common options include securing a debt consolidation loan, moving existing debt to a credit card with lower interest, borrowing money against the value of your home, or enrolling in a debt management programme such as debt counselling.

Each option has pros and cons, so it’s vital to understand what will work best for you, given your financial situation and goals.

How does debt consolidation affect my credit score?

Applying for a debt consolidation loan will cause your credit score to dip due to the hard credit enquiry by the credit provider. However, your score will improve over time if you make timely payments on your new loan. If you opt to consolidate your debt through debt counselling, your credit score will not be negatively affected (although it may already have been impaired by non-payments of accounts).

Are there any risks associated with debt consolidation?

Yes. If you take out a debt consolidation loan and fail to pay, your credit score will be affected, and you may risk legal action. If the loan has an extended repayment period, you may end up paying more overall. Similarly, if you fail to honour your debt counselling obligations, you will be in violation of your debt counselling agreement and may face legal action from your creditors. Debt consolidation takes discipline – you need to manage your money well or you could end up in deeper debt.

Can I consolidate my debt if I have a bad credit score?

Yes, but lenders will consider your credit history when evaluating loan applications. This may result in less favourable terms or even denial if your credit record is poor – which could mean that you won’t qualify for a debt consolidation loan. However, if you’re genuinely overindebted, you’ll qualify for debt counselling, which helps to protect your credit score.

What alternatives are available if I’m not eligible for a debt consolidation loan?

If a debt consolidation loan isn’t an option, you could try communicating with your creditors to see if you can reach a debt settlement agreement. Or, you could contact a debt counsellor to find out if you qualify for debt counselling. Make sure you understand how each option works before deciding on a course of action.