There are a number of ways in which you can arrange to have your debts consolidated but the most common way of doing this is to take out a loan. Perhaps the idea of taking out another loan in order to pay what you already owe seems a bit short sighted. Nevertheless it can be the easiest way to settle your debts, lessen the stress involved and eventually become debt-free.

There are two basic types of consolidation loans: secured or unsecured, but whichever you choose the same three components will be present: the principal amount which you borrow, the interest which is charged on the amount, and the management fees and other relevant fees charged for initiating the loan.

Unsecured loans:

An unsecured loan is money which is lent without the borrower having to provide any form of collateral, although you will almost certainly have to prove receipt of a regular monthly income. This means that, if you should default on the payments, your property will not automatically be repossessed. However, because no assets are required to be signed over to secure the loan there is a certain level of trust, and risk, involved for the lender. As a result the interest on the capital is usually considerably higher than that of a secured loan. For this loan to be beneficial it is crucial to ensure that the combined interest and management fees do not exceed that which you are already paying on your individual accounts.

If you have no major assets to offer as security, or if you have a poor credit history these might be the only loans available to you. As a rule unsecured loans are not provided by major banking institutions and it is unlikely that you would qualify for a large sum of money to consolidate your debts without having any form of security to offer.

Secured loans

A secured loan is money lent against collateral offered by the borrower. This could take the form of a house, motor vehicle or other property. If you take a secured loan and then default on your payments the lender is entitled to sell the collateral to recover his money. Because of the relatively low risk involved in a secured loan the principal amount for which you will qualify can be considerably higher and the interest rate, in turn, significantly lower than that of an unsecured loan.

In South Africa the most common route to go when consolidating your debts is to take a second bond on your home. Although this puts your home at risk should you be unable to pay back what you owe, the savings in interest alone, particularly if you use the money to pay off credit cards debts, makes this a very attractive option.

Some major banks offer a flexible home loan which makes extra capital available on your bond and then combines all your accounts into one facility. By consolidating your accounts in this way not only do you benefit by a lower interest rate when your salary or other funds are paid into the combined account, but only one monthly banking fee is payable.

Both secured and unsecured consolidation loans can provide you with a way to deal with debts which have become unmanageable. Your ultimate choice will be determined by your needs and your circumstances.