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  The main problem with Consolidation loans is that after the accounts which are consolidated are paid off, they are not closed, allowing the consumer to utilise a number of those accounts again and in...  

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Banks shun consolidation loans

Banks wary of granting consolidation loans as they tighten lending criteria.

Banks appear to be taking a tough stance on consolidation loans as they tighten their lending criteria.

A consolidation loan involves pooling the balances on outstanding debt together into one loan with one single monthly payment and one interest rate. If used wisely, consolidation loans can help consumers lower their monthly spend on loan repayments and improve cash flow.    

However, those wishing to consolidate loans, ahead of the new year, may be surprised to find that banks might not be able to help.

 A deteriorating credit environment has forced banks, working to lower the non-performing loans on their books and mitigate risk, to tighten their lending criteria.  

The National Credit Regulator’s latest Consumer Credit Market Report shows that 54.45% of the 9.95 million credit applications processed by various lenders in the June quarter were rejected. At R83.9 billion, banks accounted for 77.45% of the R108.33 billion in credit granted over the period.

Hannalie Crous, head of credit at FNB Retail said debt consolidation, which forms part of FNB’s loans product offering, makes up a small portion of loans granted by the bank as it is restricted to lower risk customers.

“As a credit provider we are committed to ensuring that customers are not over indebted when credit is granted, this is done in line with the National Credit Act regulations as well as the bank’s own affordability criteria,” she said.

Following the implementation of the National Credit Act in 2008 and the obligations it places on the credit provider, Absa scrapped consolidation loans as part of its standard product offering.

“As a rule in the industry, one institution will not take on debt from another. The regulators don’t allow for consolidation loans to be recorded on Credit Bureaus as such and as a result, customers can repeatedly find themselves in a position of over indebtedness, at the expense of the consolidating institution,” explained Rekha Ramcharan, head of personal and business Lending at Absa Retail and Business Banking.

She said the bank might consolidate debt into a mortgage loan or into a personal loan only in exceptional circumstances. Exceptional circumstances that it would consider include serious medical issues, which prevent their customers from being economically active, and periods of unemployment.       

Capitec Bank also does not offer consolidation loans as part of its standard product offering. “Clients can qualify to consolidate their credit products if they are up to date with Capitec and pass the same rigorous affordability calculation and risk assessment that is applied for any other credit application,” the bank told Moneyweb.

Vere Millican, group executive of credit at African Bank, said the bank only offers consolidation loans to select customers and only consolidates debt from select credit providers such as banks.

“Consolidation loans are offered by African Bank based on a clients’ risk profile and their affordability assessment. Based on this criterion 25% of all applicants that apply for a loan qualify for a consolidation loan, of which 15% take up the consolidation offer,” he said.

He said the bank consolidates debt from R200 to R200 000 at interest rates of 19% to 28%.

Standard Bank said consumers should only consider using long-term debt solutions when “absolutely necessary” as discounted rates are unlikely to offset the additional costs associated with extending a repayment period.            

It said that a personal loan of R20 000 payable over 48 months at an interest rate of 14.25% per annum would result in monthly repayments of R549.04 and total payment of R26 353.97. The same loan, extended to 84 months and with a reduced interest rate of 11.25% per annum would result in a monthly payment of R345.08 and total payment of R28 987, which amounts to an additional payment of R2 633.03.  

The banks all said customers should not take on additional debt until the consolidated loan is paid off. 

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A bit disappointed that Moneyweb would publish a story without challenging blatantly untrue statements by banks that a 84 month loan at 11.25% is more expensive than a 48 month loan at 14.25%.

Let me prove this by way of example: if you opt to take the loan over 84 months at 11.25% and pay only R345.08 per month, then you can take the saving of R203.96 (being difference between R 549.04 (48 month loan repayment) and R 345.08) and invest this in a savings account at 7% interest per annum. The value of these savings after 48 months will be R11,260.48. Whereas the capital balance on the 84 month loan will be R10,502.41 at that same point. This means the 84 month loan can after 48 months be settled in full by the savings. This means that with repayment of only R345.08 per month the borrower achieved the same result as if he had taken the 48 month loan and repaid R 549.04 per month !!!

The main reason banks would not want to issue loan at the lower interest rate over the longer period is because it results in lower profit margin for them.

The main problem with Consolidation loans is that after the accounts which are consolidated are paid off, they are not closed, allowing the consumer to utilise a number of those accounts again and in this way become more overindebted and the consolidation loan has only contributed to their overindebtedness. Take for example a client who consolidates a number of clothing accounts, these are paid off and the account stays open with a zero balance and can be utilised without a new credit assessment. This cannot be the intention of the NCA!!

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