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Value of consolidating credit card debt tool

Critics of debt consolidation say it’s a “con” because it dupes you into thinking you’ve done something about your debt.In fact, your debt is still there – you’ve just moved it, they say.

This would leave you with a single home loan of R790 000 and a monthly instalment of about R7 110, excluding fees, charges and insurance.And the habits that landed you in debt probably haven’t disappeared either.That may seem harsh, and it wouldn’t apply to people who have landed in debt due to retrenchment or reckless lending.For people who are in danger of defaulting on their loan repayments, Penwarden says debt consolidation may be their only option.“Certainly debt consolidation can be a lifeline and is preferable to a judgment or a repossession of your house or car.In this way, you go from having numerous creditors and credit agreements, with various terms, interest rates and monthly fees, to having one loan with one creditor and being liable for one monthly fee.

Typically, your debt consolidation loan would provide you with a lower overall average interest rate over a longer loan term.

In this scenario, your monthly cash flow saving would be about R3 500 (the difference between what you were paying to service all your debt before consolidating it and what it would cost you after doing so).

The interest saving would be about R1 260 a month – or R15 200 a year.

At a glance, it seems a great idea, giving both interest savings and better cash flow. Penwarden says despite the interest saving each month, the reason you pay R3 500 less each month is that, instead of repaying your debts over three, four or five years, you are now extending that same debt to 20 years (the notional period of your bond).

This means that in the long run you will pay much more interest on that debt. “The only way to prevent this is to pay as much of the ‘extra’ R3 500 into your bond every month as soon as you can afford to,” Penwarden says.

But it would be true for many people in debt, and the remedy for them is behaviour change – such as learning to live on less – not more debt.