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Fin24 Money Clinic | If I settle my debt with a consolidation loan, will it affect my credit score?

A Fin24 reader who is in the process of applying for a home loan questions if it will be a good idea to settle his debt with a consolidation loan. He writes: "Is it a good idea to settle my debt with a consolidation loan? I have a good credit record. Will it affect my credit score if I take out the loan? I'm in the process of applying for a home loan." Read the full article on Fin24; we include an extract of the answer below.

Benay Sager, chief operating officer at DebtBusters, responds:

Consolidation loan is the name given to large personal loans (generally in excess of R150 000) with usually high interest rates (generally 18% to 24% per annum). The purpose of these loans, among other things, is to "consolidate" other, smaller loans so that the consumer can pay their debt with a single payment.

In theory, the idea sounds good. In practice, the consumer is replacing one type of debt with another one, so it is crucial that the consumer compares interest rates of the loan(s) (or other debt) being replaced against the interest rate that she would get from the consolidation loan. In most instances, a consolidation loan will be more expensive for the consumer, and most consumers will also be tempted to take out other loans once they get a consolidation loan.

Read the full article on Fin24.

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