Debt Consolidation

What is Debt Consolidation?

Debt consolidation involves taking out a new, larger loan to pay off multiple smaller loans. The primary goal is to combine your various debts into one single payment. If you have multiple loans, it can be overwhelming when multiple credit providers are hounding you; many people consolidate their debt so that they only have to deal with one credit provider.

When is a Debt Consolidation Loan a Bad Idea?

Debt consolidation makes sense if it results in a lower interest rate and a shorter repayment term. However, it’s important to understand that this isn’t a guarantee. You should not take out a debt consolidation loan if:

• You can’t afford the new loan payments until the loan is repaid.
• You don’t clear all your debts with the loan and you use the loan for something else, instead.
• Your new net interest rate is higher than your current net interest rate.
• You end up paying more in total as a result of the monthly repayment being higher or the term of the agreement being longer.
• It will cost you to consolidate. You should take into account high interest rates, a once-off initiation fee, monthly admin fees, service charges, and any other charges related to the loan.
• The debt consolidation loan does not cater fully to your day-to-day cash flow needs.​​​​​​

The Problem: Your Money Behaviour Doesn’t Change

Behaviour change is crucial. A debt consolidation loan alone won’t change your spending habits. Many times, after people consolidate their debt, the debt grows right back. Why? Because they don’t have a game plan to change how they look at money, to start paying cash, and to spend less. In other words, they haven’t established good money habits for staying out of debt and building wealth. Their behaviour hasn’t changed, so it’s very likely that they’ll go right back into debt.

Types of Debt Consolidation Loans

There are mainly two types of debt consolidation loans:

1. Secured loans

Secured loans are backed by an asset, like your home. While taking a secured loan might give you access to a larger amount and a better interest rate, the big risk with a secured loan is that you could lose your home if you fall behind on the loan.

2. Unsecured loans

Unsecured loans are not backed by assets. A prominent example is a personal loan. They are often for lower amounts, which might not allow you to consolidate all of your existing debts, and come with higher interest rates.

The good news is you don’t always need a loan to consolidate your debt. Find out if you qualify for debt consolidation without taking a new loan.

Why is Debt Consolidation Without Taking a New Loan a Better Option?

If you’re feeling overwhelmed and over-indebted, you need to address the root cause rather than take out a new loan. In this case, debt review, also known as debt counselling, offers a more effective solution with better protection and fewer downsides.

Our NCR-registered debt counsellors can negotiate with your creditors to arrange a manageable repayment plan. Debt review offers several benefits:

1. Consolidate Your Debt Without a Loan: Instead of taking out a loan, entering debt review allows you to make a single, reduced monthly payment to cover your debts. You get the benefits of a debt consolidation loan — not having to deal with multiple creditors and simplifying your repayments — with the added benefit of protection for your assets. When on debt review, your home and car are protected against your creditor providers.
2. Debt Review Changes Your Money Habits: Our counsellors will provide regular action plans and financial tips to help change your money habits. These address the root cause of a debt problem: how you think about your money.
3. Your Household Expenses are Covered: Your debt counsellor will work out a budget with you that covers your household expenses and reducing your monthly debt repayment to an affordable amount.
4. Reduced Interest Rates: Because our debt counsellors will negotiate with your creditors on your behalf, and because debt review is a legally-recognised process, debt review has the potential to significantly reduce your interest rates, sometimes as low as zero. You are unlikely to obtain such concessions from your credit providers otherwise, especially with an unsecured loan.

Learn more about debt counselling.

Debt Consolidation Loan vs Debt Review

The table below summarises the key differences between taking out a debt consolidation loan and debt consolidation through debt review:

How to Choose The Right Debt Consolidation Strategy

1. Assess Your Debt: Start by calculating the total amount that you owe, including interest rates and monthly payments.
2. Explore Options: Look into different consolidation methods like personal loans, balance transfer credit cards, or home equity loans. Compare those with debt review.
3. Compare Interest Rates: Ensure that the new consolidation loan has a lower interest rate than your current debts. Speak to a debt counsellor to determine what kind of interest rate reduction you could expect in debt review.
4. Read the Fine Print: Be mindful of loan terms, fees, and any penalties. Understand the implications of debt review, the most important of which is that you cannot take out new loans while on debt review.
5. Plan Your Payoff: Have a clear strategy for paying off the consolidated loan. On debt review, your debt counsellor will guide you every step of the way.

Which Debt Consolidation Option is Right for You?

While taking out a debt consolidation loan can be a smart financial move, it's not a one-size-fits-all solution. It's most effective for those who:

• Have a good credit score to qualify for low-interest rates;
• Are disciplined enough to avoid accumulating new debt; and
• Have a steady income to cover the new loan payments.

The drawbacks of a debt consolidation loan are:

• Longer Payment Terms: Some consolidation loans may stretch out payments over a longer period, which could mean paying more interest over time.
• The Risk of Losing Your Home: If you use a secured loan (like a home equity loan), your assets may be at risk if you can’t make payments.
• Temporary Credit Impact: Initially, applying for a new loan might impact your credit score.

Debt counselling is likely to be the right option for you if you’re feeling overwhelmed, in a debt spiral, and over-indebted. If you’re looking for fundamental change — a fresh start, debt-free — you should consider debt consolidation through debt review.

Use our free Debt Solution Finder to see which option is right for you!