How to get loan consolidation right

When you have multiple loans, it makes sense to combine them into a single loan. This means you now have only 1 loan repayment a month. Ideally at a lower fixed interest rate for the same period of time, or over a new term.

The benefit of a lower interest rate is that you pay back less on what you borrow.

To consolidate multiple loans, you add up what you owe on all your debts and apply for a new loan to settle them all. This leaves you with 1 loan to manage at what should be a lower interest rate. You can see what you’d expect to pay monthly and in total using this free, interactive loan consolidation calculator.

The interest rate on store and credit cards is usually higher than a personal loan. Although, this depends on many factors, including your risk profile and loan term.

You might be able free up some cash if your single monthly repayment is lower than your combined payments were. But you could also choose to increase your loan size by taking out extra cash for personal use when you consolidate.


Consolidation: it’s all in the numbers


It always pays to look at the numbers. If you’re going to end up paying more in the long run, make sure it’s an informed decision you’re making. You can compare total loan repayments for different loan terms using the loan consolidation calculator.

Let’s say you have total debt of R20,000 in personal loans. And let’s assume the average interest rate across these loans is 20%, and that it’s going to take 3 more years to pay them off.

In this scenario, you’ll end up paying back nearly R31,500 in total on the R20,000 debt, at an average monthly payment of about R870.

If you choose to pay back the consolidation loan over 5 years instead of 3, this would give you the immediate benefit of saving on your monthly repayments.

If you do this, with an 18% loan, your monthly payments will be lower at about R620. But the total you’ll pay back over the 5 years will be about R37,000.

So, you might gain in the short term by having extra cash each month, but in the long run you’ll have sacrificed more than R6,000 paying interest.


You can reduce the interest you pay


There are 2 ways to reduce the interest you pay. Either continue to pay the same amount you paid previously across your existing loans – which should be more than the monthly repayment required on your new loan, so you will pay it off faster and pay less interest as a result.

Or else, set a repayment amount that lets you pay back your debt consolidation loan in 3 years, as you would have with your existing loans.

Doing this, based on the scenario above, you could pay almost R1,000 less in interest than if you’d kept your original loans.