Debt consolidation is no quick fix

If you’re in the market for a debt consolidation loan, you may find it difficult to get one unless you’re a low-risk client or have a home loan. reports OVER- INDEBTED?

Most of the banks are offering debt consolidation loans, but they have become more discriminating than ever about who qualifies for these loans.

A debt consolidation loan is a loan used to pay off multiple loans. It has been referred to as “debt displacement”, because it moves debt from many different accounts into one account to save on interest or help with cash flow.

Nedbank’s debt consolidation loans are granted “primarily” to the bank’s transactional clients and only “best-risk clients” qualify for such loans, Warren Tromp, the head of value analytics at Nedbank Personal Loans, says.

Hannalie Crous, the head of credit at First National Bank (FNB) Retail, says the bank’s debt consolidation offering is restricted to “lower-risk customers” and constitutes a small proportion of the number of loans that the bank grants in a month.

Absa scrapped its debt consolidation product last year in response to misuse of these loans by consumers who don’t use the loans to pay off debt. However, since many of its customers have taken up loans with other lenders at higher interest rates than those offered by Absa, the bank has recently reintroduced a debt consolidation product, Jan Moganwa, the chief executive of customer solutions at Absa Retail and Business Banking, says.

In terms of Absa’s new product, the bank will settle the customer’s existing debt directly “and consequently remove the option of a customer being tempted to draw down on that facility”.

This appears to be a new distinguishing feature of debt consolidation loans. If you are given a loan by African Bank, Capitec, FNB or Old Mutual, they will pay your creditors on your behalf with the proceeds of the loan.

Alfred Ramosedi, the group executive for sales and marketing at African Bank, says the bank will settle your debts with registered credit providers only. In other words, if you have borrowed from a friend or relative, or a loan shark, the bank will not pay them.

According to Crous, when a credit provider grants you a debt consolidation loan, the National Credit Act (NCA) “requires credit providers to take reasonable steps to ensure that other obligations are When a debt counsellor has found you to be over-indebted and taken you into debt counselling, you are prohibited (in terms of the National Credit Act) from taking on any new debt, with the exception of a debt consolidation loan for the specific purpose of settling other debts.

Ian Wason, the chief executive of the debt counselling company DebtBusters, says that, to his knowledge, debt consolidation loans to overindebted consumers “have never been done or tested”, suggesting that the market is reluctant to offer such a product to over-indebted consumers.

Wason says the average consumer with debt has five credit agreements and many could benefit from consolidating their multiple monthly payments into one monthly payment, if only from an administrative point of view. “It also means that consumers have a much better handle on how much money they owe in total,” he says.