Frans asks: I currently have debts to the amount of R15 000. Is it a wise decision to apply for consolidation and settle my debts or should I continue to make regular payments towards my accounts even though it will take me a while to finish them?
Maya replies: It all depends on the interest rate you would get if you consolidated and what your time period is on your various loans.
If your bank could offer you a single loan at a lower interest rate than you are currently paying on your various accounts, then it would make sense to take out the loan.
You would be able to settle the debts and only have one loan to repay. The aim is to continue to pay the same total amount in instalments and use the lower interest rate to shorten your repayment period. It is also easier to manage just one account.
However, there is always a cost to taking out a new loan and what one finds is that it is not worth doing if the repayment period is less than six months as the upfront administration costs negate any benefit from lower interest rates.
You can also use your home loan to consolidate your debt as interest rates on mortgage finance are far lower. However, only do this if you are very disciplined and will continue to repay the debt at your current rate.
If you default to the mortgage repayment amount then you will be paying off your short-term debt over 20 years, which will significantly increase your interest costs. For example R15 000 paid off over 20 years will actually cost you R34 700.
What you should do is to sit down and look at your budget and see if there is anywhere that you could cut back (a cheaper DSTV option, car-pooling to work, entertainment). Take this extra money and repay your debts as quickly as possible. Take the short-term pain to get debt free and stop paying interest to creditors.
Once your debts are settled you will be able to channel the money you were repaying into savings so that you do not need to take on debt in the future.
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