Consolidation Loan Alternative
What is a Consolidation Loan?
A consolidation loan is when you take out a new loan to replace your current loans. This can be credit cards and other personal loans.
You want to consolidate your loans, because you would like to make only one payment to one creditor instead of many each month. The second reason will be to lower your monthly payments each month. The only way to lower monthly payments is if you pay lower interest rates and the term of the loan is extended.
As an example you have the following:
Personal Loan A for R4000.00 at 35% for 2 years repayment is R234.07
Personal Loan B for R6000.00 at 25% for 4 years repayment is R198.94
Credit Card A for R5000 at 23% repayment is R261.87
Credit Card B for R3000 at 26% repayment is R161.62
Total Debt = R18000.00 and monthly repayments are R856.51
You want to consolidate R18000 into one loan and only pay one creditor each month. You can do that by increasing your mortgage on your house by R18000.00. Currently (February 2010) the prime rate on bonds are 10.5% and the term is normally 20 years, but say your current bond only has 10 years left. The monthly repayment on R18000 over 10 years and at interest rate of 10.5% is about R242.88. Your payments have dropped dramatically by R613.63 per month.
To do a consolidation you must have 100% clean credit record and a mortgage.
But what if your don’t have a clean credit record or mortgage?
The Debt counselling as alternative to consolidation will bring down your monthly installment down in the same way as a consolidation loan. The difference is that you keep all your accounts, but your debt counsellor will go to each creditor and negotiate new repayment terms that you can afford to pay each month. The debt counsellor does this by negotiate a new lower interest rate and longer period to repay each of your creditors.
This is very similar to what is happening when you consolidate namely that the repayment term is extended, the interest rate is lower and you make one payment to the Payment Distribution Agency each month.
If you are not able to consolidate, consider debt counselling as an alternative.