Understanding debt consolidation loans

Dealing with multiple debts can feel overwhelming. If you’re juggling store accounts, credit cards, and personal loans, it’s easy to lose track of which payment is due next.

More than 18 million South Africans actively use credit, and many of them are looking for ways to simplify their repayments and regain control of their finances.

One effective solution is a debt consolidation loan. This type of loan allows you to combine multiple debts into a single loan with one monthly repayment.

In this guide, we explain what a debt consolidation loan is, how it works, the benefits and risks, and its impact on your credit score.

Register on the JustMoney platform to apply for a Sanlam personal loan of up to R350,000.

What are debt consolidation loans?

A debt consolidation loan is a debt management solution that helps you pay off existing debts.

It is typically a large loan that can be used to pay off several smaller loans. This means you will owe money to just one credit provider.

How does a consolidation loan work?

A consolidation loan works by paying off your existing smaller debts with one larger loan, resulting in a single monthly repayment to one lender instead of multiple payments to different creditors.

For example, you owe:

• R10,000 on a credit card
• R5,000 on a store account
• R15,000 on a personal loan

You take out a R30,000 consolidation loan to settle these balances. Instead of three repayments, you now have one monthly instalment.

Note: The interest rate on debt consolidation loans can be higher or lower than your existing debts, depending on your credit profile and affordability. Always compare the total cost of credit, not just the monthly instalment.

Types of debt you can consolidate

Debt consolidation loans typically allow you to consolidate personal loans, credit cards, retail store cards, short-term loans, and certain student loans. By combining these short-term debts and making only one monthly payment, you can radically simplify your finances in a single step.

Certain debts – such as home loans and vehicle finance – typically aren’t consolidated with a consolidation loan. There are a few reasons for this:

• Consolidation loans are usually unsecured. Home loans and vehicle finance are secured loans, backed by the house or car. Lenders treat these differently as defaulting on a secured loan allows them to repossess the asset.
• Consolidation loans are designed for shorter-term debt. Combining them with long-term secured debt would create mismatched repayment schedules.
• Lenders cap how much you can borrow. This means you can’t consolidate all your debts if the total amount you owe exceeds the lender’s limit. 
• Secured loans usually have lower interest rates because of the collateral. Rolling them into an unsecured consolidation loan could increase your interest rate on that portion, which would not benefit you.

There would be additional legal, administrative, and compliance complexities to combining these different loan types.

The benefits of debt consolidation

Managing multiple debts can feel overwhelming, thanks to different due dates, varying interest rates, and constant financial pressure.

According to financial planner Sylvia Walker, author of Smartwoman: How to Gain Financial Independence and Create Wealth, debt consolidation can help you regain control.

“When you’re in over your head, debt repayments take priority, and you run the risk of not having enough money to live on. This causes enormous stress,” Walker explains.

Consolidation loans typically carry standard personal loan interest rates and fixed repayment terms, based on a client’s credit risk and affordability assessment. When weighing up whether you should take out a debt consolidation loan, ask yourself the following questions:

• Is the loan going to reduce my overall interest rate?
• Is the loan likely to reduce the total amount I have to repay?

If the answer to both questions is ‘yes’, a debt consolidation loan is a good option for you.

Relieves financial pressure

A single structured repayment plan reduces stress by making repayments more manageable, so you don’t risk running out of money for essentials.

Instant debt settlement

A consolidation loan allows you to pay off existing debts immediately, giving you a fresh start with a single repayment plan. However, you’ll still need to service the new debt, so choose a loan that comes with a lower interest rate than your current debts.

 Simpler monthly payments

One repayment instead of many makes budgeting easier and reduces the chance of missed due dates.

Lower monthly instalments

If your new loan has a lower interest rate or longer term, your monthly repayments may be more affordable.

Potential credit score improvement

Paying consistently and on time can support a healthier credit profile over time.

Whether debt consolidation loans are a good idea or not depends on the interest rate, fees, repayment term, and your spending behaviour going forward.

Signs you may benefit from debt consolidation

You may benefit from debt consolidation if:

• You’re managing three or more active credit accounts 
• You’re regularly missing or delaying payments
• You’re paying high interest on multiple short-term loans
• You have a stable income and can commit to repayment 

When a debt consolidation loan might not be suitable

A consolidation loan may not be ideal if:

• Your credit score is too low to qualify for favourable loan terms
• You’re already overindebted – meaning you can’t manage to repay your debts each month
• You rely on credit for daily living costs
• You’re likely to continue using credit for day-to-day living expenses

Debt consolidation works best if you’re burdened by multiple high-interest debts – but you must commit to not overusing credit in the future, which is a challenge for many people.   

High-risk debt consolidation loans – what to know

High-risk debt consolidation loans are typically offered to consumers with low credit scores or recent missed payments. Because the lender takes on more risk, the interest rates and charges are usually higher.

This can mean:

• Higher interest rates
• More fees
• Stricter repayment terms

While approval may be easier, the total repayment can be significantly higher. Always review the full cost before accepting a high-risk consolidation loan.

Risks and drawbacks of a debt consolidation loan

There are some financial risks that come with a debt consolidation loan.

One of these is converting short-term debt, such as store or credit card balances (usually repayable over 12 months), into long-term debt that can stretch over five years.

“While this is good for your immediate cash flow – and your budget will look better – you’ll be paying a lot more interest, so the debt will cost you more in the long run,” Walker warns. “This can negatively affect your ability to build wealth.”

Even if you can secure a lower interest rate, consider the loan term before signing.

Also worth noting is that if your credit score is low, you may not qualify for an interest rate that’s significantly better than those on existing loans. “The best rates go to applicants with good credit,” Walker points out.

In addition, banks may charge initiation and service fees on the new loan, which may mean steeper debt initially.

If you’re used to using credit for daily living, or simply overusing it because you can, a debt consolidation loan may not be the best idea. Some people pay off their debts with a consolidation loan, only to start accumulating debt again.

“You won’t necessarily change your behaviour, or learn new ways of managing your money,” cautions Walker. “Debt consolidation must be accompanied by behaviour change: understand how and why you got into debt in the first place, and what you need to do to avoid repeating the problem.”

Key risks at a glance

If you do secure a consolidation loan, it’s a good idea to pay it off as quickly as possible so you don’t pay more interest than is necessary. Initiation fees, monthly service fees, and early settlement penalties can add up quickly, so always check the total cost of a loan – not just the interest rate.

Which banks offer debt consolidation loans in South Africa?

Many major banks and registered lenders in South Africa provide personal loans that can be used for consolidation, subject to credit and affordability checks.

Each lender applies its own criteria, interest rates, and fee structures. It’s important to compare offers side by side rather than choosing based on approval speed alone.

Register on JustMoney’s platform for a quick and easy way to apply for a personal loan.  

How does debt consolidation affect your credit score?

A consolidation loan can affect your credit score in both positive and negative ways, depending on how you manage it.

When you apply for a new loan, the lender performs a “hard” enquiry – a formal check recorded on your credit profile – which can lower your credit score temporarily. Missing even one payment on your new loan can also have a negative impact.

However, making just one payment a month makes it easier for you to pay on time, allowing you to build a positive payment history. This can boost your credit score.

If you use a consolidation loan to pay off credit cards, your revolving credit balances will drop. This lowers your credit usage, improving your credit score over time. The biggest risk occurs if you’re not in control of your spending – you may settle outstanding debt, but simply start accumulating it again.

Short-term impact vs long-term benefits

When you first take out a consolidation loan, your credit score may dip slightly due to the credit check and new account opening. But as you make consistent, on-time payments, your score should improve over time.

Common mistakes that hurt your credit score

Try not to make the following mistakes, which can lead to a lower credit score:

• Missing payments on your new loan
• Taking out new credit before you’ve paid off your consolidation loan
• Closing old accounts too quickly, which can reduce your credit mix, shorten your credit history, and raise your credit utilisation ratio, all of which may lower your credit score

A higher credit utilisation ratio means you’re using more of your available credit, which can temporarily lower your score. Keeping one or two of the paid-off accounts open but unused means your available credit stays higher and your utilisation stays lower. This is generally better for your credit profile in the short term.

Note, however, that every credit bureau model differs slightly in South Africa. The precise impact on your credit score will depend on your overall credit history, the types of accounts you have, and how credit bureaus score your profile.

Are debt consolidation loans a good idea?

They can be – if the new loan is affordable, competitively priced, and paired with disciplined money management.

They are generally more suitable if you are not overindebted and can qualify for a reasonable interest rate. If your debt is already unmanageable, a regulated intervention may offer stronger protection.

FAQs about debt consolidation

Does debt consolidation reduce my debt?

This depends on whether you take out a consolidation loan or consolidate your debt through debt counselling. Debt consolidation doesn’t reduce the total amount you owe – it simply combines multiple debts into one payment.

With a consolidation loan, you may pay less each month if you secure a lower interest rate, but the overall cost can be higher if the term is longer. Through debt counselling, your repayments and interest rates are renegotiated to make them more affordable, and you’re legally protected from creditors. Both options make debt easier to manage, but only debt counselling offers legal safeguards.

How long does it take to get a consolidation loan?

Approval for a consolidation loan (or similar personal loan) in South Africa can be very quick – often within minutes if you are eligible. In other cases, it may take a day or two, depending on the lender and your financial profile.

Will my credit score improve immediately?

Not instantly. Improvement happens as you clear your debts, and over time, as you make regular, on-time payments in service of the debt consolidation loan.

Is debt consolidation better than debt counselling?

Consolidating your debt with a loan may be a good option if you’re not overindebted; however, if you have unmanageable debt and have started to skip payments or avoid creditors, debt counselling is your best option.

Can I consolidate store and credit card debt together?

Yes. Most consolidation loans allow you to include unsecured debts like credit cards, store accounts, and personal loans.