A personal loan can be a useful tool to achieve your financial goals. It can help pay for your children’s education, house renovations, and medical expenses. But can it be used as a tool to save you money?
We chatted to financial services experts to find out.
Tip: To see whether you qualify for a personal loan, click here.
What is a consolidation loan?
Neil Thompson, head of product and customer value proposition at African Bank, says a personal loan can indeed save you money, but only when it’s in the form of a consolidation loan.
“A consolidation loan is used to settle external debts. You can have any remaining capital paid into your bank account,” Thompson explains.
Basically, you transfer your existing loans into a single loan with a single monthly instalment. This can reduce fees, Thompson says.
The benefits of a consolidation loan:
According to John Manyike, head of financial education at Old Mutual, a consolidation loan can save you money and benefit you in the following ways:
- Depending on your credit rating, you may qualify for a much lower interest rate on your new consolidation loan.
- You will only pay a single initiation fee.
- You will pay one single admin fee each month, rather than multiple admin fees.
- A single monthly repayment can reduce bank transaction fees.
- You will have the benefit of paying a single credit life policy instead of multiple policies.
- You may have pre-approved credit for future needs.
- You will have a better idea of when you will be debt-free.
The disadvantages of a consolidation loan:
Manyike points out that, as much as consolidation can save you money, it can also have disadvantages. These include:
- You may take longer to get out of debt as payments are spread out over a longer period.
- You may spend more in the long run, as you end up paying more in interest over the loan term.
- As you “free up” cash on your existing accounts, you may be tempted to get deeper into debt.
- It doesn’t solve the problem, only the symptoms if the underlying behaviours that got you into debt are not dealt with.
Thompson says when it comes to managing debt and saving money, it’s worth empowering yourself with easy financial literacy courses and budget tools online, in branches and on selected financial apps.
“Saving and budgeting takes discipline and it is worth taking the time to understand it better,” says Thompson.
“However you plan to approach your finances, it is our recommendation that you always seek expert financial advice. Speak to an adviser when it comes to managing your finances and planning your financial future,” adds Manyike.
To see how you can consolidate your debt with JustMoney, visit this page.