A Fin24.com user writes:
With the rising interest rates, fuel and food pricing every one is talking debt consolidation.
Do banks really look at the equity in property? Recently, I've applied to consolidate debt into my home loan (which according to my bank has equity, by the way) and this was declined based on "affordability".
As most of my debt is with the bank anyway, in the form of credit cards and lease agreements, the repayments on these are more than what it would've been should this have been consolidated into my home loan.
What is the exact criteria that is taken into consideration for debt consolidation and if declined what is the next step?
Do I really have to see a debt counsellor as this makes me feel as I am inadequate to handle my own finances, which I don't think is the case and I still have to pay a fee. Momentarily I am just managing to pay everything, but find that I am left with very little for living expenses.
I have approached various banks, bond originators and even debt consolidation companies the response is always the same - affordability.
Even if I could arrange for a better interest rate, the "affordability issue" keeps popping up (30% of gross salary, according to NCA regulations) - bear in mind I bought before June 2006. I have a good rate - which is why my bank and other banks cannot assist with anything further.
The National Credit Regulator responds:
When you want to consolidate all you debt in your home loan and apply for debt consolidation, the bank will basically have two considerations.
The bank will first look at how much your bond was when you bought it and do a valuation on your property now.
For example, your bond was R300 000 in 1999, but it is now worth R1.2m.
The bank can then increase your existing bond up to R1.2m, which gives you access to money to settle your other debts, which usually have higher interest rates.
A new monthly instalment will be calculated, which may be considerably higher given that it's a larger loan.
The bank will then assess whether you will be able to repay the amount (consolidated amount) which means now they are doing the affordability test on the R1.2m; they will also take your payment history into account.
It is important to stress that the National Credit Act does not contain any numbers or percentages linked to the affordability test - so, it is untrue that that there is a 30% allocation in terms of NCA regulations.
The legislation merely requires the credit provider to assess
- the consumer's ability to appreciate the consequences of the debt,
- the consumer's previous repayment record; and
- current means to service the debt.
Every credit provider therefore has a different score card (you must shop around to assess the different offers).
The user may feel that it is unfair that her application was denied despite the information indicating that she might have afford the loan, but it is not unlawful. It remains the bank's business prerogative to decide whether to give the consumer a loan.
In the same manner as the consumer has the right to apply for a loan, the credit provider has a right to refuse the loan as long as such refusal is not based on unfair discrimination as prohibited by the Constitution Act.
The NCA does not impose any obligation on the credit providers to provide loans to consumers it merely requires them to do an affordability check before they do.
Whether the bank should take into account the "equity" in the house in order to make the determination whether to advance the "debt consolidation loan" to the consumer pretty much remains a matter of agreement between the parties. The credit regulation does not regulate the matter.
There is another option open to the user, given that her application for debt consolidation has failed and she also does not want to approach a debt counsellor.
She could negotiate with her credit providers on how much she is able to pay on a monthly basis and maybe stretch the repayment period, which will decrease the amount payable monthly.
Once she has finish paying one debt, she can then use the money (the money used to pay the settled debt with) to pay a bit more on other debt, which should result in getting rid of all her debt earlier than expected.
- Fin24.com