For consumers who are already struggling with higher fuel and electricity prices, increasing municipal tariffs and insurance costs, rising interest rates are further eroding their limited financial wriggle room.
The Monetary Policy Committee’s decision raised the prime lending rate to 10.5% in May, potentially marking the start of a series of rate increases as the South African Reserve Bank seeks to bring inflation down from 4% to meet its 3% target.
After 15 months of interest rate cuts, a cycle of rising rates is bad news.
“For people with debt such as home loans, vehicle finance, and unsecured credit, the additional interest payments will make it harder to preserve enough disposable income for everyday expenses, let alone contribute to savings or longer-term investments,” explains Gavyn Letley, Product Head at DirectAxis.
As rising costs continue to outpace salaries and financial pressure mounts, debt consolidation may offer a solution for consumers who are still meeting their obligations but are looking for a more manageable and cost-effective way to structure their debt.
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Unlike debt counselling, which involves a formal debt review process and the restructuring of debt through a court- or tribunal-approved repayment plan, debt consolidation combines multiple debts into a single loan with one monthly repayment.
Letley says this can be particularly effective for consumers who still have a reasonable credit profile. It allows them to simplify their finances without entering a formal legal process that can take between three and five years, depending on the amount of debt to be repaid.
Consolidation has become increasingly popular, and nearly 40% of all DirectAxis’ approved applications are for debt consolidation loans.
The benefits include:
Improved cash flow: Consolidating debt can save on service fees and credit life cover costs, putting some money back into consumers’ wallets.
The interest rates charged are based on the applicant’s risk profile. Depending on their credit score, the rates can be better than credit agreements such as credit cards or retail accounts, but consumers should consider the total cost of the loan, as interest is paid over a longer period.
The combination of an extended loan term at a personalised interest rate can result in lower monthly instalments, providing immediate relief for households under pressure. This can create room to pay off debt faster, build up savings or an emergency reserve.
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A single monthly repayment: Instead of managing multiple accounts with different repayment dates, consumers can make a single payment to one lender, reducing complexity, stress and the likelihood of missed payments.
Financial flexibility: Consumers under debt counselling cannot apply for credit until they receive their clearance certificates. Those who choose to consolidate their debt to achieve some financial stability can apply for credit, provided they meet the affordability and lending requirements.
A clear repayment timeline: Consolidation loans usually have fixed repayment terms, so consumers know exactly when they’ll be debt-free. This also makes long-term planning easier.
Consolidating debt can have advantages, but Letley warns that it restructures debt; it doesn’t reduce the amount owed.
“Debt consolidation is most effective as part of a broader financial recovery plan. Consumers must remain dedicated to their journey, and any savings should be directed at either paying off other debt sooner, building wealth through savings and investments, or planning for retirement.
“It creates the right opportunity for consumers to focus on what they want to achieve and starts with creating some financial breathing room”
Consumers needing help with budgeting and financial planning can get sound financial advice via the My Advisor feature on the FNB app.