Debt Consolidation

South African consumers are swimming in a sea of debt. Currently consumer credit to households is estimated at R760bn with 14 million active credit consumers and 50 million open accounts. The average % of debt to income is 73%. There are 80,000 judgments for debt per month.

Making the minimum payment on all your credit cards, home loans and personal loans will not cut it. The compounding of interest (interest on interest) is working against you and some day, you will find yourself in a big financial hole if you do not do something about it.

Therefore consumers are turning to debt consolidation loans, attracted by the benefits and advantages these loans have to offer. Lets discuss some of the possible advantages of debt consolidation.

Single Payment

Most consumers prefers to make a single payment instead of having to make payments to several creditors. This way, you can do away with the damaging effects of dealing with unmanageable debts. A debt consolidation loan will help you bring your entire debts under one umbrella. Keeping track of your money will not be difficult.

Interest Rate Reduction

A major benefit of debt consolidation loans are due to the fact that the interest rates are half to one-third the interest charged for revolving credit card accounts. Debt consolidation loans are secured loans - meaning your home is used as collateral while borrowing money. This reduction in interest rate turns out to be a blessing for consumers.

Monthly Admin Fees Savings

By consolidating your debt, you are not only saving on the overall interest rate, but you are also saving on all your monthly charges for all your separate accounts. This can be substantial if you take into account all the monthly administration charges for your bond, overdraft, loan, car repayments etc.

Low Monthly Payments

You eliminate all your high interest debt when you consolidate your debt. You will now be making a low monthly payment on your debt consolidation loan and this is the only loan you need to worry about and pay off.

However, before jumping into debt consolidation loans, you should do some calculations first on the interest you are paying on your current credit card and personal loan accounts and then check how much you will be saving by getting a debt consolidation loan. Next you should plan to use these savings (interest) to pay off your debt consolidation loan as soon as possible, to maximize savings.

Tax Free Investment

More and more people are get caught by the debt trap, the key sucess to financial freedom is to get rid of your bad debt and acquire good debt.

Bad debt is debt that carries high interest rates and high payments such as credit cards and personal loans.
Good debt is money that you borrow to purchase an asset that works for you and put money in your pocket.
Here are some ways that will help you eliminate your bad debt and help you get more good debt

1. When ever you make purchases with your credit cards it must be paid off in full at the end of each month, credit card companies make money of the interest they carge you, the sooner you pay off your card the more money you’ll save, most credit card companies give you 55 days before they start charging you interest, try to pay the outstanding balance in full before the 55 days grace period.

2. Make a list of all your credit cards, personal loans, vehicle loans, overdraft accounts, clothing and stores accounts and any other bad debt that you have.

3. Refinance your bond to consolidate your high interest debts.
Chances are you have built up enough equity in your home to pay off high interest credit cards and personal loans. Your home loan advisor can help you determine how much equity is available and how much you can save by increasing your bond balance to pay off bad debts at a much lower interest rates
Debt is crushing the dream of many South Africans to become financially independent. However, the determination to get out of the rat-race remains a driving force in keeping the dream alive. You can reduce your stress and live a debt-free life if you make some drastic changes in the way you live.

First, forget the Joneses. There will always be people, even your peers, who will have more than you. It’s impossible to keep up with them and in most cases it’s absurd to even try. Let them have their flashy cars, designer clothes, and mammoth-sized houses. Chances are, they are swimming in debt to impress others.

Whether or not you are impressed doesn’t matter. What matters is your financial future. Would you rather impress friends and neighbors with glitzy items you can’t afford or would you like to live a life free of worrying how to pay for all the junk?

Next, rethink your day-to-day spending. Now that you’re not trying to keep up with the Joneses by buying new boats, jewelry, and flat screen TVs, let’s address the little things that add up. Daily stops at the local coffee house for a latte, buying lunch or bringing take aways home for dinner, and DSTV channels all add up. Instead, brew your own coffee, cook homemade dinners, and get your movies for free at the library.

Keep track of your spending each day and get creative. Try a less expensive golf course instead of a private one, or take in a matinee instead of a night performance. You can still enjoy life but see if you can tone it down a notch or two and pocket the savings.

Once you’re comfortable living within your means, start living beneath them so that you can work on paying off your debt. Commit to paying off your credit card and then only use it for emergencies. If you can swing R500 a month toward your credit card, buckle down and try to increase that amount to R600. As you become accustomed to this monthly payment, it will become easier. Challenge yourself to pay more each month until your debt is wiped clean.

Afterwards, you’ll be rewarded with that amount each month to do with as you please. Instead of going back to your bad spending habits, build up your emergency savings or put that money toward retirement. You can never wrong by choosing to save money.

Paying off car loans, student loans, and mortgage loans never hurts either. Make extra payments toward reducing the principle and get ahead. By doing so, you’ll save thousands in interest over the course of your loan. Consider applying windfalls such as tax refunds and annual bonuses to reducing your debt.

If your car is paid for and still in working order but you find yourself wanting to replace it, consider postponing your purchase. Challenge yourself to postpone your new car purchase by two months and pocket what you would’ve spent on car payments.

Now challenge yourself to postpone it another two months. If you were expecting a R3,000 car payment, you will have saved R12,000 by waiting. Consider making car payments to yourself instead of replacing your car. Doing so will save you thousands each year. If you must buy a new car, go for a one or two year old model and get a better deal.

Living debt-free means sacrificing what you can’t afford. If this means driving a five-year-old car while the neighbors drive a brand new one, so be it. If it means living in a 150 square meter house compared to the 400 square meters one your sister lives in, that’s fine too. By freeing yourself from the bonds of debt, you will have peace of mind.

Don’t wait till you’re over your head in debt, The time to regain control of your finances is now.

 

You’ve got a beautiful home with a fully loaded kitchen, a living room with a 50-inch plasma TV and a brand spanking new vehicle in the driveway, whenever you entertain, your guests congratulate you on your success, too bad you can’t tell them the secret of how you did it the fact is your debt is up to your eyeballs! 
Few of us are wealthy enough to go through life without borrowing money. But there’s a difference between good debt and bad debt: 

 

Good debt is borrowing at a low interest rate to obtain something that is likely to grow in value. Buying a home, going to school to improve your career options or borrowing to invest are all examples of good debt. 

 

Bad debt is usually carried at high interest rates and is used to purchase things you don’t really need right now and can’t really afford. Using credit cards to buy electronics or to pay for expensive vacations and then taking months or years to pay them off are examples of bad debt. Buying a car with a 7-year loan and keeping the car for only four years is also an example of bad debt. 

 

Your first step in taking control of your finances is to put a halt to the bad debt you’re accumulating: 

 

1. Cut up all your credit cards except the one with the lowest rate, and use that one for emergencies only, some lenders even offer a credit card which linked to your home loan and carry the same  interest rate as your bond just so you won’t use high interest credit cards and default on your bond payments, 
2. Make a list of all your bad debts and make a plan to pay them off in order, starting with the debt that has the highest interest rate. 

 

Once you’ve tamed your spending, consider these strategies to help you pay down your debts faster and with lower charges: 

 

Consolidate your debt 
If you have several high credit card balances, consider taking out a single loan and paying off all your accounts at once. A debt consolidation loan will almost certainly carry a lower rate than your credit cards, and personal loans that can mean big savings. For example, if you owe a total of R50,000 on three cards with an average rate of 25%, paying them off by taking out a loan at 14 percent will save you R3,000 a month and rather than several payments each month, you’ll have just one. 

Another option, especially if you’re thinking about a new bond, is cash-out refinancing. This allows you to turn your home equity into cash to pay off what you owe, and then add that amount to your primary bond. Your new principal will be higher, but your rate will almost certainly be much lower than what you are currently paying on your consumer debts and, again, you’ll have the convenience of a single monthly payment. 

 

Refinance your car loan 
After your bond, your car loan is probably your biggest debt. you may be paying more than necessary. Consider shopping around for a new auto loan to replace your current one.

Consolidating and refinancing can be useful tools to help you get out of debt. But remember, the only way to make sure you don’t once again find yourself in over your head or up to your eyeballs is to spend less money than you make.

No matter how much debt your have, the key to avoiding more debt is to control your spending. While there is no magic bullet to getting out of debt, keeping your spending in check greatly increases your chances of living debt-free.

 

1. Make a budget.
Spending without knowing how much your are actually spending is a recipe for financial disaster. Making a budget doesn’t necessarily mean that you spend less, either. What it helps you to do is focus on your priorities.

To make a budget, first list out all of your monthly payments from debt and bond payment to water and lights account. Don’t forget items you don’t pay every month, such as GIM memberships and insurance. Then, using your monthly take-home pay (after tax and after savings), subtract your monthly loans and bills so you know how much is left for items such as patrol, groceries and clothing.

But don’t stop at this point. Make sure you aren’t spending more than you think on little items such as, dinners out, dry cleaning and movies. You’ll also want to make sure you have an emergency savings account, for things like emergency car and home repairs. This prevents you from having to use a credit card to pay for unexpected expenses.

 

2. Be disciplined.
Part of the budgeting process is establishing discipline in your spending. When you look at how much money you make each month and how much you actually need to live, you may find that you do not have as much as you thought for things such as going to movies or restaurants. You may have to cut back on spending until your debts are paid off. Be creative in your cuts – use coupons, have movie nights at home, hunt for sales. And remember you can reallocate money. Instead of spending R150 a week at the dry cleaners, cut back to R50va week and spend the leftover R100 on a movie. This is why budgeting is important – if you know where your money is going, it’s easier to reallocate your spending on things that are truly important to you.

 

3. Set goals.
Knowing where you are going can make being disciplined easier. Set some financial goals of where you want to be. This can help you in keeping your spending in check. Start with the big picture. Where would you like your finances to be in 25 or 35 years? Once you have an idea as to how you want to retire, work your way back. How much do you need to save for the next 10 years to make that happen? What about 5 years? What about next year? Are you spending everything, or are you saving now? Knowing what it will take to achieve your financial goals can give you a reason to control your spending.

 

4. Try cash only.
One trick to help you to control your spending is to pay for everything in cash. Once you have a budget, set aside the amount of cash that you will need for each expense (at least the ones that you can pay cash for). Make an envelope for each spending category: groceries, dining out, patrol, babysitting, etc. Once the envelope for a category is empty, you cannot spend any more for that category until the next month, unless you take money from another envelope. This budgeting exercise forces you to make choices so you are spending your money on what’s most important to you. In addition, paying cash helps you realize how much you are truly spending, so you tend to spend less.

 

5. Leave the credit cards at home.
If you know your credit card is in your pocket, then you know you have it for backup. To keep from spending, leave your credit cards at home so you aren’t even tempted to use them. One word of caution – if you are traveling, it is probably better to take at least one in case of an emergency. But, for you daily life, there is no need for a credit card to tempt your spending. You can’t add to its debt load if it is not with you.

By working hard to control your spending, you will be rewarded by not only being able to pay off your current debt but also by avoiding more debt. You are on your way to financial freedom.

Consolidation loans are one way to help you repay your debts at a lower interest rate with lower monthly payments.

If you are having a hard time repaying multiple loans, you may want to consider a consolidation loan. Consolidation loans, also referred to as “debt consolidation loans,” take several outstanding debts and consolidate them into a single loan. In other words, you take out a new loan with a lower interest rate and use that loan to pay off your other debts.

With a consolidation loan, you will be able to:

• Lower your monthly payments
• Arrange a longer period of time to repay your debts
• Obtain a lower interest rate loan
• Get the security of a fixed-rate loan

A consolidation loan can also be helpful if you are having a hard time managing your budget because of the constant inflow of monthly bills.

With a consolidation loan, you only have to keep up with one payment per month, rather than juggling bills from various lenders and creditors.

You can even arrange to have your consolidation loan debited automatically from your bank account each month, so you won’t have to keep track of any paperwork.

Most of the advantages of debt consolidation are long term, however, so if you have only a small amount to repay, or will be able to repay your debts within a few years, it may not be the best choice for you.

It’s also important to understand that just because a consolidation loan may leave you with more money each month, it is not a magic bullet.

You need to carefully examine your budget and change your spending habits, Otherwise, you will soon end up in the same predicament you were in before and you don’t want that!

Take control of your finances and pay off your creditors.

 

If you’ve got a mountain of high-interest debt, you may benefit from taking out a debt consolidation loan. This involves taking out a single, lower-interest loan (often a further home loan) and using it to pay off all your creditors. That way you can concentrate on one monthly payment and pay off what you owe much faster, at a lower interest rate.

 

Consolidating your debt can help you get closer to financial freedom. But it takes careful planning and the discipline to follow through:

 

Determine Your Debt Load

Make a list of all of your current debts, excluding your bond, and determine what you’re paying on these accounts each month.

 

Let’s say you have credit cards that charge 26% and a department store credit card with a rate of 29%, you also took out a personal loan with a five-year term at 26%.

Here’s what your debt might look like:

 

Credit cards:                             R70,000

Department store credit cards:    R25,000

Personal loan:                           R50,000

Total debt:                                 R145,000

 

Now add up the monthly payments you’re making on these accounts. For your credit cards this may vary, so use an average of your last six months or so. We’ll assume you’re paying 5% of the total balance on the bank-issued card and 10% on the department store card:

Credit card:                               R3,500

Department store credit card:     R2,500

Personal loan:                           R1,100

Total monthly payments:            R7,100

 

 

Now you’ve got a clear picture of your situation: when you consolidate your debts, you will need R145,000 to pay off your creditors, and you’ll want your monthly payments to be less than R7,100

 

 

Shop for the Best Loan

There are several types of loans to consider when consolidating debt:

 

• Home loans offer the lowest interest rates, because they’re secured with your house and because they’re a type of bond.

Following through with the above example, you might consider taking out a further home loan for R145,,000 at 14% interest over 20 years, the monthly payment would be just about R1,850 – that’s more than R5,000 in savings on your monthly payments.

 

•Cash-out refinancing is another option. It involves taking out a new mortgage on your home that’s larger than your current one. For instance, if you have a R500,000 outstanding bond balance and your house is worth R800,000, you could take out a new bond for R645,000 and use the extra R145,000 to pay off your debt. Even if your monthly payment increases, it will still be less than your combined loan payments were before and the amount of interest you’ll pay will be greatly reduced.

 

• A personal loan can also be used to consolidate your debt if you don’t own a home, or you don’t want to use your home as collateral. The interest rates on these loans are higher than those of a home loan, but are usually lower than credit card rates. With a three-year loan at 26%, you could pay off R40,000 with less than R1,000 a month.

When you’re shopping for loans, don’t forget to factor in up front fees and points as well as interest rates. The loan’s annual percentage rate (APR) is a good benchmark for comparison.

 

 

Commit to a Timeline

After you’ve found the best loan, sit down and figure out a timeline for paying off your debt.

 

Control your Spending

This may be the most important step of all.

Consolidating your debt only works if you resist the temptation of running up your credit cards again.

Getting out of debt is not easy, and it won’t happen overnight. However, the rewards of being debt-free are worth the effort.

 

There are many ways to reduce your debt and improve your cash flow.

 

The first obvious step in reducing your debt is to stop it increasing and start paying it off.
Most South Africans find it too difficult, but you can do it with a planned strategy:

Know your Debt: The first thing you have to do is to make a list of all your open accounts, your outstanding balance and monthly payments, Just to make your life easier in the process you should obtain a credit report from ITC (Trans Union) or Experian, the 2 major credit bureaus, your credit report contains the most updated report about your financial profile, payment behavior and accounts information, you’ll be able to see if there are any judgments defaults on your name, if you assume something is inaccurate you could easily dispute it with the credit bureau.

Save on interest charges: Credit cards, overdraft and loans carry different interest charges, by simply shifting your debt from a high interest facility into a lower interest one you will be reducing finance charges on money borrowed, that will reduce your monthly payments as you will be paying a lower interest.

Shift your debt around: applying for a balance transfer credit card is a good idea, balance transfer credit cards carry low interest rates for the first few months, the idea is to figure out which cards or loans are the most expensive and simply transfer their balances to the new low interest balance transfer credit card, this will save you money on interest charges and will allow you to pay your credit cards quicker, the best thing to do is to close those high interest accounts once you transferred their balances, this will make sure you don’t fall deeper into debt.

Home owners debt consolidation: Borrowing money against your property is a great way of consolidating your debt, interest rates on your home loan are 50% lower than most credit cards or personal loans on the market, banks will lend you money cheaper should you secure an asset against the loan, this way they reduce their risk and the lower their risk, the lower the interest they will offer you, unsecured loans (credit cards, personal loans, etc) don’t have any type of security backing them up therefore interest rates on those products are pretty high compares to a home loan.

Don’t wait too long as it might be too late: once you fall behind it won’t be easy to obtain a debt consolidation loan, banks qualify you based on income and credit profile, chances of obtaining a loan or a credit card for those who have good credit are much better than those who have missed few payments or already blacklisted, late payments and debit returns on your bond account are the most crucial when applying for a new debt consolidation loan, try to avoid late payments on your home loan, late payment on credit cards or personal loans are not as bad, bear in mind, the better your credit is, the better the interest rates that you will be offered.

The name of the game: make sure you keep all your loans and credit card at the lowest interest possible, high interests loans are the banks bread and butter, planning your debt reduction smartly will keep a nice amount of money in your pocket rather than paying it to the banks.

If you are carrying more than one personal loan, vehicle loan and credit card debts , chances are you find it hard to keep up with your monthly payments, the increase in patrol and food prices doesn’t work in your favor either, if this is your situation you should really consider debt consolidation.

Debt consolidation is simply combining all of your high interest loans into a low single one.

Unsecured loans like Credit card and personal loans have very high interest rates varies between 20%-36% compare to secured loans like home loans interest rates at 13%-15% therefor property owners can use this advantage to borrow money at a much lower interest rate and save a substantial amount of money every month.

When looking at a debt consolidation loan, you need to consider what makes you desirable as a borrower: it will make a difference in the interest rate you will be offered.

Security
What assets do you have that can secure your loan? Do you own a property, a vehicle? Lenders are happy to lend money to people with assets.

Repayment to Income Ratios
How much debt do you have?
Usually, if you have more debt than you have income coming in, a lender is less likely to give you a loan, unless it’s specifically for debt consolidation.

Credit
How is your credit score? Do you make payments on time?
The better your credit score is, the more likely you are to get better interest rates on your loan, Better interest rates means lower payments and more savings.

Many people find themselves without too much money at the end of the month, there are many ways in which you can turn your situation around.

 

The purpose of this article is to give you some insight into the things you need to do and what options you have.

 

Yes, options. There are a number of ways to improve your situation:

 

1. Develop a budget!

What you’re actually doing here is tracking your money, both incoming and outgoing.

You should study the problem, looking for the most troublesome areas, you may not even need any further debt reduction action than this.

Developing a budget helps you to change your mindset about money, it forces you to live below your means instead of beyond them, that translates into to saving money, it will also help you figure out how much money you will save every month should you decide to consolidate your debt.

By all means, regardless of the debt reduction strategies that you choose to employ, implement this one first!

 

2. Home Owners Debt consolidation - The classic Debt Consolidation loan.

The idea behind debt consolidation is to pay off high interest unsecured debt (credit cards, personal loans, store accounts, overdraft facility) with a lower interest loan, lower interest rates will result in big savings.

Home loans interest rates are a lot lower than any unsecured loan, as the bank secure the property against the loan which reduces the risk of them losing money should you default on your payments, lenders formula is pretty easy to understand, secure an asset against a loan,and you will be offered lower interest rates, what if you can’t secure an asset against the loan?, well, you’ll still be going to able to borrow money but at a much higher interest rate, unsecured loans interest rates varies between 20%-36% which is extremely high compares to secured loans at 13.5%-15%.

Home owners can use their property to borrow money cheaper, pay off their debt, have only one monthly payment and save a substantial amount of money each month, here is an example to show you how crucial debt consolidation could be:

R200,000 in unsecured loans will cost you about R12,000 a month to maintain, the same money borrowed from your property will cost you aprox R2,500 a month, you can potentially save close to R10,000 a month, sound too good to be true, well… Understanding the lending industry can save you big bucks.

You can apply for debt consolidation online, there are few companies like RatesDirect who are specialized in debt consolidation for home owners and non home owners.

 

3. Sell some assets to pay off your debt.

Do you own more than one property or have some assets? Cashing out some of your assets could easily get you out of debt.

Selling an investment property, selling some stocks or mutual funds could get you the cash you need to pay off your debt and improve your cash flow.

Remember, should your situation improves you can, at any time buy another investment,

 

 

4. Pay more than the monthly minimum on your credit cards.

If you can pay more than the minimum monthly payments, do it, continuously.

As a matter of fact, do it with all of your as long as you can afford to.

Pay more toward your higher-interest cards first.

 

5. Restructure your bond payments.

Debt consolidation can improve your cash flow significantly, by simply paying more towards your bond payment you can reduce the term of your bond and save thousands in interest charges.

 

6. Lower your bond interest rate.

Lowering your home loan interest rate will reduce your monthly payments, your lender probably won’t agree to reduce your interest on your home loan as you already signed the loan documents, but you can easily switch your home loan to another lender who will happily take the business and improve your existing interest rate.

 

7. An unsecured loan.

If you don’t have any other property or assets, an unsecured loan may be an alternative. An unsecured loan usually has a shorter term, normally with a maximum of 12- to 60 months.

The monthly payments will therefore be higher, but the debt principal will also reduce more quickly.

Because there is no security you should expect to pay a higher interest rate. Unsecured personal loans generally require good credit in order to obtain.

 

8. If all else fails, there’s still the credit card option.

This one is last on the list for a reason. If your debts are relatively low and you still have pretty good credit, apply for another card with a low-interest balance transfer feature.

Try to get a low balance transfer card if you can realistically pay off all or most of the debt within the balance transfer period.

If you think that there will still be a substantial amount of debt at the end of the transfer period, then opt for a card with a permanently low interest rate.

And to ensure that you don’t slip back into the same debt trap, cut up all those credit cards and close their accounts.

 

Debt consolidation loans are only one way to get out of debt. Depending on your personal circumstances, you may not have to go that far. But you won’t really know until you sit down and take stock of your situation. A good, realistic budget will help you do that.

Remember, the best way to get out and stay out of debt is to change your habits.

 

Beware of little expenses; a small leak will sink a great ship.
Said Benjamin Franklin,

 

The first step of digging your way out of debt is Gaining control of the urge to splurge.

The second is studying ways to lower high interest expenses, such as credit cards and personal loans that you may have accumulated over time.

These six steps can help reduce your debt load:

1. Time is money.
Don’t wait until your situation turns from bad to worse, lenders lend money cheaper to those who have good credit record and chances you qualify for a debt consolidation loan are higher.

2. Track your expenses.
By keeping a close eye on your purchases, you can determine which are needed and which are not. You can then formulate an action plan to reduce unnecessary expenses and free up money to pay down debt.

3. Leave your credit card at home.
Consumers are likely to spend more using a credit card than when paying in cash. Also, closing credit card accounts can help you resist the desire to overspend by restricting your credit limit.

4. Consider a debt consolidation loan.
You can benefit from lower interest payments if you transfer the balances from high-interest credit cards to a lower-interest loan such as a home loan.

5. Pay more than the minimum payment on your loans.
Most south Africans are making either the minimum payment, or no payment at all, on their outstanding credit card debt.
Using money from a money market account or other savings (most likely earning less than 10% interest rate) to pay off credit cards (that may carry 28% interest rate) could be a very wise investment decision..

6. Negotiate a better deal with your bank.
Don’t be afraid to ask your bank if they are willing to lower their interest charges or reduce your required monthly payments to help you get back on track. This is a better alternative for banks rather than having blacklisted and write off bad debt.