Consolidation loan is the name given to large personal loans (typically over R 150,000) with generally high interest rates (typically 18-24% per annum).
A Fin24 reader who is applying for a home loan wonders if it will be a good idea to pay off their debt with a consolidation loan. He writes:
Is It A Good Idea To Pay Off My Debt With A Consolidation Loan? I have a good credit history. Will it affect my credit rating if I take the loan? I am in the process of applying for a home loan.
Benay Sager, COO at DebtBusters, answer :
Consolidation loan is the name given to large personal loans (typically over R 150,000) with generally high interest rates (typically 18% to 24% per annum). The purpose of these loans, among others, is to âbundleâ other smaller loans so that the consumer can pay off their debt in one installment.
In theory, the idea sounds good. In practice, the consumer replaces one type of debt with another, so it is crucial that the consumer compares the interest rates on the loan (s) (or other debt) to be replaced with the interest rate he would get from the. consolidation loan. . In most cases, a consolidation loan will be more expensive for the consumer, and most consumers will also be tempted to take out other loans once they have secured a consolidation loan.
Any new line of credit or loan (in this case, a consolidation loan) is on the consumer’s credit file and, therefore, has an impact on the consumer’s credit rating. What will be the impact (positive or negative) depends on a number of factors, so it is difficult to comment. In this case, the consumer has indicated that they want to apply for a home loan. If this is the case, we do not recommend that you take out a new loan (consolidation loan) because it is likely that the new loan will cost more. Instead, the consumer should focus on paying off the debt they currently owe.
Overall, a consolidation loan does not settle debt; instead, it replaces one type of debt with another. It must therefore be well understood by the consumer. A better solution for most consumers is debt counseling, which actually reduces their debt by paying it off over a period of time based on what the consumer can afford. Debt counseling has the net effect of consolidating monthly debt repayments into one payment, but it actually helps the consumer pay off debt over time. For consumers interested in reducing the number of debt repayments they make each month, this is an option to consider.
Questions can be edited for brevity and clarity.