Understanding Debt Consolidation: A Closer Look

Debt Consolidation is a popular option for individuals struggling with multiple debt obligations. It involves combining several smaller loans into one larger loan, often with a single monthly payment.

Let’s consider a typical scenario:

Mr. A. Peters earns R18,000 per month (net). His monthly living expenses amount to R12,000, leaving him with R6,000 to service his debts.

Here’s a breakdown of his existing debts:

• Personal Loan 1: R1,800 monthly, R38,000 outstanding, 28% interest rate.
• Personal Loan 2: R2,200 monthly, R56,000 outstanding, 26% interest rate.
• Personal Loan 3: R3,200 monthly, R86,000 outstanding, 26% interest rate.
• Store Card 1: R800 monthly, R8,000 outstanding, 23% interest rate.

The Problem:

Mr. Peters faces a significant financial burden. His total monthly debt repayments amount to R8,000, with a substantial portion (around R4,115) going towards interest payments. This leaves him with limited disposable income and potentially reliant on credit to cover basic living expenses.

Consolidation: A Potential Solution?

A Debt Consolidation loan of R188,000 at 28% interest could potentially reduce the number of monthly payments. However:

• Increased Interest Burden: The overall interest payments on the consolidation loan would likely be higher than the combined interest payments on his existing debts.
• Extended Repayment Period: The repayment term for the consolidation loan would likely be longer, potentially stretching out the debt repayment period.

Debt Consolidation vs. Debt Review:

Debt Review offers a distinct advantage in this scenario:

• Reduced Interest Rates: Debt Review typically involves negotiating lower interest rates with creditors, significantly reducing the overall cost of borrowing.
• Reduced Monthly Payments: Debt Review often results in significantly lower monthly installments, freeing up more disposable income for Mr. Peters.

Important Considerations:

• Unsecured vs. Secured Consolidation: Unsecured loans (like personal loans) generally have higher interest rates than secured loans (like home loans). However, secured loans increase the risk of losing your home if you default on payments.
• Individual Assessment: Each individual’s financial situation is unique. It’s crucial to consult with a qualified financial advisor to determine the most appropriate debt relief solution.

Contact Us:

If you’re struggling with debt, contact Debt Check for a free consultation. Our experienced advisors can assess your situation and guide you towards the best solution for your specific needs.

Call us at 0860 017 454 or complete the form above for a free call back.