Consolidation Loan is a popular form of debt for consumers who experience difficulty to repay their current loan instalment. Most of the credit providers like Old Mutual Finance, African Bank, Capitec offer consolidation loan products to consumers who qualify. Credit Providers pay the loan to consumers as a lump sum so that consumers can use these loans to consolidate their debt.
Although it has several advantages, consolidation loan generally puts more financial stress on consumers. Vantage has concluded 3 reasons why consumers should not get a consolidation loan.
Reason #1: High upfront fee and interest cost
Credit Providers make profits from consumers through initiation fee, monthly fee and Interest
Initiation Fee : Credit Providers charge R1,050 on every consolidation loan they grant, this is an upfront cost and it is generally capitalized in the total loan amount.
Monthly Fee : This is a monthly account charge,and it costs around R57 per month.
Interest Cost: This is a tricky concept as most consumers do not pay much attention to the interest cost of a loan. The maximum interest rate for consolidation loan is 28% – Check out the latest interest Cap
To explain in simple numbers: You get a loan for R100,000 with 28% interest rate. You will pay this loan off over 36 months.
Your monthly payment will be: R4,193 + R57 = R4250 and your total payment over the 36 months will be R4250 * 36 = R153,000. So you borrowed R100,000, but you need to pay back R153,000 in total and the difference of R53,000 is the interest. Sometimes consumers wonder why does the loan balances reduce so slowly when I pay every single month? It is because of the interest rate, especially when you miss a few payments on your loans, the loan amount end up growing higher than the original amount.
Reason #2: You may not qualify for the consolidation loan when you need it
Consumers may not qualify for consolidation loan when they need it. It is because that consumers only consider consolidation loans when they run into debt troubles. Mostly they have missed a few payments on the accounts and their credit score has been negatively affected.
Like most other loans, Credit Providers require consumers to have good credit score and good affordability. If you do not have good credit score and the affordability, they will not give you the consolidation loan you want. In most cases, people who are really in need of a consolidation loan do not qualify for one.
Reason #3: Consolidation Loan does not help you to become debt free, it just gives you more debt
Most consumers look for consolidation loan when they have trouble in repaying their debt and they consider this as the best solution for their struggle. But the reality is that you will just get yourself into more debt. Consolidation Loan just simply extends the term so that you will pay your debt over a longer period. This means that you will carry this financial burden over a long time and any expected financial trouble may put you in a worse position. According to our findings, many consumers do not use the lump sum to consolidate their debt, instead they will spend a portion or even all of them on something else. The consolidation loan end up putting the consumers in a deeper debt trouble.
Consolidation loan is not a viable financial option when you have debt troubles. As another loan is very likely to bring you more pressure. Think wisely
If you have difficulty repaying the your monthly debt repayment, please speak to our financial expert. We will provide a comprehensive assessment and free advice to your situation. Contact Us Now!