Finances

Debt consolidation loan: what is it and how does it work?

Turn all your debts into just one that can be paid monthly in small installments with a very low-interest rate! Read on and learn!

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Everything you need to know about debt consolidation loans

Debt consolidation title with written calculations.
Debt consolidation loan: what is it and how does it work? Source: Adobe Stock

It is possible to turn all your debts into just one and greatly reduce your interest rate! This is not magic. This is a debt settlement strategy called a debt consolidation loan.

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So if you’re interested in getting rid of your debts, read on! Learn about this service below!

What is a debt consolidation loan and how does it work?

A debt consolidation loan is a type of loan that allows you to combine multiple debts into a single loan. Thus, you can turn all your bills into a single debt to be paid monthly.

Therefore, this can help simplify your finances and even reduce the rates of your debts. You’ll be able to make low monthly payments and save money in the long run.

In South Africa, debt consolidation loans are offered by banks, credit unions, and other financial institutions offer debt consolidation loans.

Before offering this credit, creditors may request information about your existing debts. You must also inform interest rates and payment conditions.

The lender will pay off your debt if approved for a debt consolidation loan. In the coming months, you must repay it generally by paying lower interest.

The benefits of a debt consolidation loan

In fact, a debt consolidation loan can have several benefits. Below, learn about the main advantages of relying on this strategy:

  • Simplified payment: trade a stack of slips for one fixed monthly payment. This prevents you from paying fines for forgetting to pay a specific bill;
  • Lower interest rates: You can usually pay off your debts at lower rates than those charged on your credit cards. Therefore, you can pay less using this strategy to get out of debt;
  • Reduced monthly payments: It’s difficult to balance your recurring bills and manage your debt. Consolidation lets you exit accounts paying low monthly amounts;
  • Better credit score: Card debt consolidation reduces credit usage percentage. For this reason, your score can improve when applying this strategy.

How to qualify for a debt consolidation loan?

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Learn how to qualify for a debt consolidation loan. Source: Adobe Stock

Debt consolidation loan services are available from major banks and lenders in South Africa.

Being over 18 and a South African citizen/permanent resident are basic prerequisites for getting any loan.

However, the eligibility criteria may differ slightly according to the bank/lender offering this service.

However, below, you can find out about the main criteria for using this strategy:

  • Have a steady income: Lenders will demand proof that you can repay the loan. To do this, prove a stable enough monthly income whether you are employed or self-employed;
  • Having a good/excellent credit score: This type of loan is only available to people with a high credit score. In South Africa, a credit score is only considered good if it exceeds 661 points. Some lenders may require excellent scores (above 781);
  • Low debt-to-income ratio: Besides knowing the debts you want to consolidate, creditors will want to know about your recurring debts. This way, these agencies can understand your ability to manage a new debt: the loan. If your debt-to-income ratio is very high, it can be difficult to get approved for a loan;
  • Offering collateral: In South Africa, some lenders may require collateral. This can be a car or property. This is a strategy that can reduce the interest on your loan.

How to get a debt consolidation loan?

Getting a debt consolidation loan in South Africa might be easier! Below, learn how to apply for this credit service today.

Calculating the size of the “hole”

Before looking for a loan, you should know the size of the debt you want to consolidate.

To do this, write down your debts and the interest rate on each debt on a piece of paper or a spreadsheet.

After such a calculation, you can even conclude that you can pay off your debts without a loan by reducing expenses.

However, if the volume of your bills can compromise your monthly budget, it is better to consider consolidation.

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Consult and choose a lender

Search the internet or go to bank branches in person to learn more about consolidation loan terms.

Also, always check the creditor’s reputation with customers who have already hired this service.

You can visit the review or opinion site. Indeed, this care can reduce the chances of having unpleasant surprises. Finally, the lowest rate is not always the best deal.

Ask about initiation fees, service maintenance fees, and everything in between.

Gather your financial documents

After finding the best proposal, it’s time to close the deal. At this stage, you will need to gather identification documents. Also, gather up-to-date proof of income and housing.

This paperwork includes a list with information on all your debts and official documents for them.

Apply for the loan

After choosing a lender and gathering your financial documents, you can apply for the loan. The lender will review your application and credit score.

This query may lower your credit score temporarily. But your score will increase again if you make your loan payments on time.

Review loan terms

African pensioner sitting at home and looking at bills he has to
S How to get a debt consolidation loan? Find out. Source: Adobe Stock

Review the loan terms and interest rate carefully if approved for the loan. Ensure you understand the repayment terms, monthly payments, and fees.

Use the loan to pay off your debts

After signing the contract, the loan money will be deposited into your account or hand-delivered.

So, you must use it to pay off all your debts. From now on, you won’t have to worry about small debts. In fact, pay the installment of your loan.

Make your monthly payments

In fact, many banks offer the option of automatic payment of loan installments.

This is a way to guarantee that you will not forget or delay an installment. If your lender offers this feature, don’t hesitate to use it.

Finally, remember that getting a debt consolidation loan is not a magic bullet. To no longer rely on this service, you must learn to manage your finances.

In fact, there are a plethora of books and courses that can help you with this. One of the main ways to get out of the “rat race” is to learn how to invest.

You can start doing it today. Just know the best investment opportunities available in South Africa. To know them, see the following post!

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About the author  /  José Gonçalo

I started reading about finance only to find better options than savings. Since then, I have never stopped studying finance, and I believe that writing about it is the best way to help individuals feel fulfilled and have a healthy financial life. Today, I balance finance and medical school studies.

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