D3 - Debt Consolidation: Your Best Friend or Worst Nightmare?
- Joe Debt
- Jun 4
- 5 min read
Updated: Aug 22
While researching the subject of debt review as in our previous post D2-Is Debt Review a Good Option For Us?, the subject of debt consolidation would often surface. So logically, we have to do research on the topic of debt consolidation.
Side note: If you're new to our blog, we recommend starting with our very first post: A1-Debt2Wealth Introduction.
Introduction
Debt consolidation might seem straightforward, but as we promised in our blog introduction, we’re committed to digging deep into every financial topic before making any decisions - no matter how simple it may appear. This is what we found out:
What Exactly Is a Debt Consolidation Loan?
A debt consolidation loan is a new loan you take out to pay off several existing debts. Instead of owing money to multiple lenders, you’ll have just one loan, one interest rate, and one monthly repayment.
For example:
Credit Card Balance: R20,000 @ 21% p.a.
Store Card Balance: R10,000 @ 22% p.a.
Personal Loan Balance: R15,000 @ 18% p.a.
You can replace all three with a single loan of R45,000 - possibly at a lower interest rate and a set repayment period, like 36 or 60 months.
Why People Might Consider Debt Consolidation Loans
Here are some benefits to consider:
1. Simplify Your Finances
Only one payment per month - no more confusion or missed debit orders.
2. Lower Your Monthly Repayment
3. Potentially Lower Interest Rates
If your new loan comes with a lower interest rate than your existing debts, you could save money in the long run.
4. Prevent Late Payment Penalties
One fixed repayment reduces the risk of forgetting a payment and getting hit with fees or hurting your credit score.
Risks and Things to Watch Out For
A consolidation loan sounds great - but it’s not always the best solution. Keep these warnings in mind:
Longer Loan Term = Higher Total Cost
Even if your monthly payment is lower, a longer repayment period may mean you pay more interest overall.
Fees and Insurance
Some lenders add extra charges - like initiation fees, monthly admin fees, or compulsory credit insurance - that increase the total cost.
Temptation to Build More Debt
If you clear your credit cards but keep spending on them, you could end up deeper in debt than before.
How Debt Consolidation Loans Work in South Africa
Most South African banks (like Capitec, FNB, Absa, Nedbank) offer these loans. A typical deal includes:
Loan term: 12–72 months
Interest rate: 13%–28% (depending on your credit score)
Added fees: Monthly service fee + initiation fee
To qualify for the best rates, you’ll need a good credit record and a stable income.
Should You Apply for One?
Evidently, opting for a consolidation loan could be a wise decision if:
You’re struggling to manage multiple debts. For example, you have several debts (like credit cards, store cards, personal loans), all with different monthly payments, due dates, and interest rates, and it can feel overwhelming to keep track of all the payment deadlines. This isn't the case with us.
For us, one of the most important and deciding factors is whether we can get a lower overall interest rate, or not.
You have the discipline not to take on new debt after consolidating.
But be careful if:
The loan stretches the repayment term too long.
The total cost (including fees) ends up being higher than your current debts.
Are We Applying For a Consolidation Loan?
Well, I just tried.
I applied for a FNB loan, online. I don't have a bank account with them besides a credit card. Part of the online application was to declare my income and expenses. I estimated my expenses to be about R5000 less than my income. The application was denied. By the way, I had to give consent for FNB to access my credit report. Apparently this will be the case no matter who you apply for a loan with. And, every time someone access you credit report to do a check, you lose a few points on your credit score. So be careful!
On a second attempt, and after googling debt consolidation loans, I ended up on Debt.co.za website. After reading through the landing page, it was obvious that they themselves don't offer loans but rather through partners (on behalf of other financial institutions). At the bottom of the page it mentions that
The interest rates charged on our partner's loans range between 20.25% and 24.50%.
From there I decided that a debt consolidation loan is not a good option for us. The average interest we pay on our debt - credit cards, bank overdraft facilities, and personal bank loans - is something close to 17%. Honestly and logically speaking, the only reason I can think of for us to take on a consolidation loan would be if the interest rate was at least 1 or 2% lower (at most 16%).
But then 🥁🥁🥁 Drumroll, please... 🥁🥁🥁. I asked ChatGPT (yes, I do consult with ChatGPT from time to time - refer to my Disclaimers and Disclosures page) "do you think there would be any consolidation loans offering a 16% interest fee or less?" and this is the response I got:
Yes—but only if you meet these conditions:
Excellent credit score (680+ with TransUnion/Experian)– Lower-risk customers may be offered rates from 12%–16%, especially from big banks like FNB, Nedbank, Capitec.
Stable, provable income– Banks reward consistent employment + payslips with lower interest offers.
Low unsecured debt-to-income ratio– If you’re not over-indebted (even before consolidation), you’re more likely to get 16% or less.
A long-term relationship with the bank– Some banks offer lower rates to existing customers (especially if your salary deposits into their account).
Even after this response, I still don't think it will be worthwhile to consider a consolidation loan. I might, however, try the bank where my salary gets paid into. What are your thoughts on the matter? Please use the comments section at the bottom of this post.
Final Thought
A debt consolidation loan can help simplify your finances and reduce stress, but only if the numbers make sense. Always do the math - or ask for help.
It wouldn't be right if we didn't check out all our options before proceeding with paying off our debt. Something we are missing is the subject of Personal Sequestration.
But before that, take a look at our next post:
Until then, take (financial) care!
NB: MAKE SURE TO HEAD OVER TO OUR DISCLAIMER AND DISCLOSURES SECTION.