Whether to try debt consolidation or not
09 May 2016
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On mobile, on digital, on demand, this is Old Mutual Live, the Money Coach edition. Hello and welcome, my name is Chris Gibbons. With me in the Old Mutual Live studio is John Manyike, Head of Financial Education at Old Mutual. John welcome, good to have you with us.
John Manyike: Thanks Chris.
CG: Now, it is a bit of a monster, I have not been terribly clever John. I have opened too many accounts at too many stores, I’ve borrowed from here and I’ve borrowed from there and it’s like I’ve got this big spider all over me. Debt everywhere, arms, legs of debt all over the place.
I was wondering if I couldn’t just put it all together into one basic account. Whether I’d be able to keep control of it a little bit better and manage to somehow pay it all off. I’ve heard of this thing called A Loan Consolidation. Could you explain to me what a loan consolidation is and what the advantages and disadvantages of loan consolidations might be? You can do that?
CG: Let’s start with the definition then.
What does it mean & is it wise?
CG: What exactly are we talking about, what does loan consolidation mean?
JM: Loan consolidation or debt consolidation as it’s sometimes called, is when you borrow a new amount. In other words, take out the new loan to pay back all or some or many of your other smaller debts. Because in that way you know that your debts are going to be paid off at a given point because you’ve got all your other creditors being paid off by one credit and that’s loan consolidation.
CG: Loan consolidation, debt consolidation the same thing?
CG: I’m borrowing money to pay money, is that wise?
JM: Some people would say it’s actually borrowing money to pay Paul, but the thing is, after paying Paul, you’re not going to borrow from anybody else thereafter, if I can use that analogy there. Yes, there are advantages.
As much as it’s not always advisable to pay off one debt with another. But sometimes it might be your best solution. If you qualify for a consolidation loan with a bank or another financial institution, you might be able to settle all your other debts. But now let’s look at the advantages to start off with.
The advantages of doing it
JM: Number one, depending on your credit rating, you might even qualify for a much lower interest rate on your new consolidation loan. It all depends on your credit record and so on, as well as the provider you’re dealing with. But also, you pay a once off initiation fee as opposed to multiple initiation fees.
Again, you’re going to pay a single admin fee each month as opposed to multiple admin fees. In other words, if you’ve got seven other credit agreements or loans, for every single one of them, you find that they often charge an admin fee. But then all that is unnecessary if you have consolidated, because you’re only paying one fee.
Then you also often have a pre-approved credit for future needs. For example, you know that in November you will need to service your car. In February next year you’re going to need to cover certain expenses, your back to school expenses and so on.
You know they’re catered for and that is designed mainly to prevent you or discourage you from going outside to go and look for other loans. But also it means that repayment for the ones that are pre-approved, that are going to happen even months later, you don’t have to pay for those upfront because it hasn’t kicked in.
Your instalment might be slightly higher when you get to that point. But you know it’s pre-approved, it’s pre-planned. We know you can afford it because your affordability has been assessed, but very important, you need to be very prudent. You need to be cautious about having to go and borrow money when you are consolidating a debt.
CG: Then, what are the downsides, is it more expensive?
The downside of doing it
JM: Look, it could be. In some instances you might find yourself having to pay more, simply because the interest might be slightly higher. But at least you know that you’re debt free. You know that in four years from now, or in three years from now, or five years, whatever the period, that I’m going to be debt free. Provided you did not entertain any other debts in between. So of course it might be slightly higher.
The other thing is that you may spend more in the long run by paying more in interest, but again, I’m going to keep repeating it, at least you know your debt free date. The other thing is, debt consolidation does not really solve the problem, but only the symptoms.
If the underlying behaviours that got you into debt in the first place are not dealt with, if you are a credit hungry person. You’re consolidating your debt and you’ve not dealt with those issues, you’re going to find yourself going to borrow more. In fact, you might find yourself wanting to consolidate a consolidation, if there is such a thing!
CG: That sounds like a nasty place to be. Let’s be clear, once the loans are consolidated, if I start missing payments, if I miss a payment or two, I’m back down the snakes and ladders, right back at square zero.
JM: You would have certainly multiplied your problem, but there is one more disadvantage that I want to highlight there as well. When you consolidate, you also might find yourself in the situation where your disposable income has increased. Because suddenly you are paying these loans that are consolidated over a longer period, so your disposable income increases.
That could also provide a false sense of financial relief because you feel that my disposable income has increased. Then you get tempted, you let your guard down and you get tempted to go and incur more debt. You need to be very careful.
If your disposable income has increased, use it very prudently. If it means putting a little bit extra on your current consolidation, you will be charging your debt. It will help you to actually shave off the interest much more quickly.
CG: Do you personally recommend it?
JM: Look, there’s no one solution for everyone. I would say people need to be very prudent when they have to consolidate their loan. They need to make sure that they’re cautious. However, I do believe there is merit for consolidating loans, but provided you’re going to be disciplined.
The key factors when looking at consolidation
CG: You’re listening to Old Mutual Live, the Money Coach edition on demand, visit dogreatthings.co.za. John, let’s just end off, the key things we have to understand and remember about loan or debt consolidation.
JM: Okay, so the key thing for me is that while it is not always advisable to pay off one debt with another, but sometimes it might be the best solution that you have. BUT, you need to be very prudent, you need to be very cautious. You need to be very disciplined after you’ve consolidated your debt. You cannot go and look for further loans once you’ve consolidated your debts. Because it will just be multiplying your problems.
CG: One other question John before we go, garnishee orders. Where do they come from and how do we solve that problem?
JM: Garnishee orders do occur, especially when a borrower has completely ignored their creditor, not even made an attempt to make an arrangement. Or maybe tried to do that very late in the process where maybe legal processes have started with a summons and so on. Because once a creditor gets a judgement against you in court, you might find yourself in a situation where they approach your employer to have the debt collected straight from your payroll. It’s not a nice thing to have.
However, the good news is, we’ve had quite a number of big employers who have approached Old Mutual and said, listen, after we’ve exposed our employees to Old Mutual’s On the Money Financial Education Programme. They saw the garnishee orders take a nosedive, simply because the relationship between the borrower and the credit providers have improved.
Because the programme advocates that you need to make an arrangement, don’t put your head under the sand, rather face your problem and make arrangements where possible. But do whatever you can to manage your money better. We find that it’s actually working based on the feedback we’re getting from employers.
CG: Fantastic and if anyone wants more information about the On the Money Programme, where would they find it?
JM: They can email us at email@example.com and we’ll gladly answer any questions they have on that and especially if they need a free On the Money Financial Education workshop. But they can also join our digital community, Facebook by liking our page which is On the Money Financial Education Programme or follow us on Twitter, which is OM_OnTheMoney.
CG: And that’s John Manyike, this has been another edition of Old Mutual Live, the Money Coach edition. Chris Gibbons on this side of the microphone, on the other side John Manyike, Head of Financial Education at Old Mutual. John, thanks for being with us.
Get in touch anytime, if you have questions for either John or me, or topics you’d like us to cover on Old Mutual Live Money Coach, please feel free to send them direct to me at firstname.lastname@example.org. We’d be delighted to hear from you. Until the next time, thanks for listening. Old Mutual Live, on mobile, on digital, on demand.