A Fin24 user writes:
I’m drowning deep in debts and every month it is the same headache. Can you please help me find institutions that can pay for my debt and in turn I pay them in one instalment every month?Clark Gardner, CEO of 6cents.co.za, a division of Summit Financial Wellbeing, responds:
Your suggestion of consolidating your debts as a debt relief mechanism should be pursued with much caution.
Consolidation does not necessarily mean you will pay a lesser instalment each month to reach a position of debt affordability that you desperately seek.
Further, you must understand the extra costs that you will now incur in entering a new loan agreement, which will include additional initiation fees and credit life charges.
However, simple checks you can make to ensure it does result in debt affordability include the following:
1. Know your affordability level
Calculate the difference between your income and living expenses. The difference is what you can use to pay on your debt instalments. Ensure the consolidated debt instalment is less than your affordability.2. Ensure lower interest rates
It is not wise to consolidate your debts into a new contract which attracts higher interest rates than your original debt. This would mean that you will be repaying excessively more than you would previously.3. Audit your settlement values
We have found an increase in the number of lenders exaggerating their settlement balances or charging illegitimate settlement penalties when being settled via consolidation loans. You are welcome to use 6cents's protection or audit solution currently at no cost to audit your settlement balances and debts.
The only two levers to ensure your consolidated instalment are lower than the sum of the current debt instalments is to ensure lower interest rates or an extended term.
Your preference should be weighted to the former, as extended term merely means more financial costs.
If you are struggling to get approval for a consolidated loan it probably means you cannot afford it. The alternative solution is then debt counselling.
Debt counselling will also ensure reduced instalments to an affordable amount with merely one payment made each month. Currently at Summit we achieve this by reducing interest rates on average from 22% per annum to 9% per annum.
That is a significant lower cost than the rate you will be charged on your consolidation loan. However, there are pitfalls to consider including unscrupulous providers, high debt counselling fees and a credit record listing.
Less certain solutions include requesting an audit on all your existing debts.
If one is overcharging, recklessly lent, invalid or from an unregistered lender we could declare the debt invalid or voidable, resulting in you saving that instalment.
That will mean an increase in disposable income which could result in the legitimate debt becoming affordable.
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