Consolidating credit

Major retail banks are offering to consolidate your debt, claiming that you’ll end up paying a smaller total every month. Is it really that easy? Old Mutual Bank product manager Ben Stander answers some commonly asked questions about debt consolidation.

Consolidating credit 

Stephen Forbes
Thu, 13 Oct 2005

This article is a printout from iafrica.com
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Major retail banks are offering to consolidate your debt, claiming that you’ll end up paying a smaller total every month. Is it really that easy? Old Mutual Bank product manager Ben Stander answers some commonly asked questions about debt consolidation.

What exactly is debt consolidation? 
Most people pay interest at different rates for different kinds of loans, for example a homeloan, credit card and an overdraft. With a debt consolidation facility a customer is re-assessed according to their individual risk profile and charged just one competitive rate.

What are the main benefits of debt consolidation? 
You should improve your cash flow through monthly interest and repayment savings. Your financial affairs should also be simpler to handle — you will have only one account to manage instead of several. You will enjoy greater control through electronically linking all your accounts, and you can manage your finances more easily.

Could you give me an example of how this works?

Before consolidation

  Home loan Vehicle finance Credit card Personal loan
Loan amount R400 000 R100 000 R20 000 R30 000
Repayment period 240 months 60 months Indefinite 60 months
Interest rate 10.5% 10.5% 17% 13%
Monthly payment R3994 R2149 R283 R683

Total loan = R550 000
Total monthly payments = R7 109

With consolidation

  Home loan Vehicle finance Credit card Personal loan
Loan amount R400 000 R100 000 R20 000 R30 000
Repayment period 240 months 60 months Indefinite 60 months
Interest rate 9.5% 9.5% 9.5% 9.5%
Monthly payment R3 729 R 2 100 R158 R630

Total loan = R550 000
Total monthly payments = R6 617

In this scenario, consolidation would reduce the monthly payment by R492.

How long does it take for a bank to consolidate my debt? 
It depends on the financial institution, but for an existing client, it generally takes four to six weeks, and for a new client, six to eight weeks.

Are there any pitfalls to avoid when consolidating your debt? 
Always try to restructure debt over the remaining term of the existing loan. Short term debt (less than 60 months) should be repaid as soon as possible and not over 240 months. Wherever possible, consult your financial adviser or broker to ensure any changes you make help you meet your financial goals.

Why would someone to whom I owe money, willingly lower their interest rate? 
Many bank customers could probably get more competitive rates than they currently enjoy as property values have increased significantly over the past few years, they have repaid some capital and could be earning more because of a salary increase.

Another reason a creditor might be willing to lower payments and/or interest rates is that unsecured debt (like credit cards) is converted to secured debt (a homeloan). However, the debt consolidations currently being marketed are geared at individuals who are in a good cash flow situation.

How do I find out if I qualify for debt consolidation? It’s best to speak to your bank manager who will take into account factors like how much is still outstanding on your homeloan, your current income, how responsibly you have repaid debt, etc. You can also speak to your adviser or broker.

What costs are involved if I decide to consolidate my debt?
Old Mutual Bank is currently offering a homeloan switch and consolidation facility at no initiation fee, no valuation fee and no bond registration fee. To qualify for the consolidation facility, you will need to take out a minimum loan amount of R200 000.

Where should I channel any resulting savings? 
It’s best to consult a good financial adviser who can take an objective, holistic look at your overall financial needs. Many people use the resultant interest savings to accelerate their repayments and reduce the term of their homeloan, start or consolidate retirement planning, save for their children’s education, or address other gaps in their financial planning.

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