Consolidation loans cause more debt

“Do you realise 90% of your salary is going to paying your debt, leaving you with only 10% to survive — and you still have to buy food, electricity and water …?”

Asking that question of “Miriam” was Freddy Kamutiba, DebtBusters’ top financial consultant, who took her call this week on the floor of DebtBusters’ massive call centre in Cape Town’s city bowl.

I had been invited to listen in on several of these calls; calls which had clearly taken those on the other end of the line a lot of courage and commitment to make.

Like many who are horribly

num-’ over-indebted, Miriam hadn t really interrogated her bers: all she knew when she made that call to the country’s largest debt counselling company was that “my debt has got too much”.

A 39-year-old state employee, she is divorced, with two sons — one adult and the other schoolgoing — all living with her parents.

She earns a net salary of R11,800 and is trying to service a total debt of R485,000.

Miriam’s biggest problem is the consolidated loan she took out in 2024 in an attempt to deal with another loan she took out the previous year.

The second loan, of R158,000, over a five-year term, costs her R5,856 a month.

With a few taps of his keyboard, Kamutiba tells Miriam that in the previous 10 months she paid R58,000 in repayments for that consolidated loan, but her debt has only reduced by R12,000.

“So in just 10 months, that debt has cost you R46,000,” he says.

He tells her, kindly but firmly, that she’s made her situation worse.

“The interest rate for the second loan is even higher than the first. You should not be paying 28% interest, because you are over-indebted.”

It’s a subject which Kamutiba can claim to be an expert on. He has a master’s degree from Stellenbosch University, for which his thesis was titled Investigating the Appropriateness of Consolidation Loans to Mitigate Household Over-indebtedness in SA.

He studied while holding down his job at DebtBusters, providing him with ample research material.

“Research shows that an increase in unsecured credit is not directly related to consumption and economic growth, but to the use of credit to pay credit through consolidation loans,” Kamutiba concluded in his thesis.

“Consolidation loans are driven by aggressive marketing that takes advantage of naive consumers.”

In his research, he sampled 50 consolidation loan-seeking consumers, 10 financial consultants from IDM Group (which DebtBusters forms part of), and analysed consolidation loan marketing messages on credit providers’ websites.

“The results indicated that consolidation loan practices constitute predatory lending, which exacerbates household over-indebtedness,” he found.

The marketing of these loans over-emphasises the benefits while downplaying the downside.

“Consolidation loans cause more debt, not less, because they result in new costs, and higher interest rates, increases in the terms of payment, and they affect affordability over a long period of time,” he wrote.

And Miriam was a perfect example of that scenario.

“Legislative reforms are required to prevent predatory lending and improve debt literacy and household budgeting,” he recommended.

Back in the call centre, Kamutiba is not only working on a proposal to slash Miriam’s consolidated loan interest rate to a single digit figure but also coaching her on practical ways to cut down on her expenses.

He asks her how she buys her electricity.

“It’s prepaid,” she says.

“I buy vouchers every few days.”

Gently he tells her she’s paying too much that way.

“Rather buy for the month in the first five days of the month.”

Kamutiba also encouraged her to buy goods on lay-by.

The downside for consumers is you don ’ t get your hands on the goodies until after

the’ you ve paid for them in full, but upside is you pay no interest, and you are legally entitled to cancel at any time, for no reason, and get almost all your money back.

Miriam agreed to go under debt review, in terms of which she’ll pay a reduced amount to settle her debts.

It’s going to take her five years to be free of them, and she will be barred from taking any form of credit during that time, but she’s looking forward to the relief.

“I got paid yesterday,” she tells Kamutiba, “and I’ve got no money left today. I can’t do what I want to ...”

Last week, the National Credit Regulator revealed that 36% of SA’s 27.5-million credit active consumers were “not in good standing” by the end of last year.

That means 9.8-million people are more than three months in arrears with their repayments, have adverse listings on their credit records or judgments and administrative orders. X (Twitter): @wendyknowler Facebook: wendyknowlerconsumer