How a consolidation loan works
You take one loan large enough to settle several debts — store accounts, a credit card, short-term loans — and pay one instalment from then on. Some lenders pay your old creditors directly and give you their settlement letters; others pay the money to you, and then it is up to you to settle every account the same day.
After that, close the accounts you settled, or at least cut their limits. A consolidation loan only works if the old debts stay at zero; if the store cards fill up again, you end up with the new loan and the old debts at the same time.
When it saves money and when it does not
It saves money when the new loan's interest and fees are lower than the average of what you pay now and the term is not much longer. Replacing short-term loans, which may charge up to 5% a month, with a personal loan capped at a yearly rate is the clearest case.
It costs more when the lower instalment comes only from a longer term. The table above shows the legal maximum on R30 000: over 36 months at most R1 304.96 a month and R48 510.17 in total; over 72 months the instalment falls to R928.95, but the total rises to R68 740.21, because interest and the monthly service fee run for twice as long.
A simple test before you sign: add up the total still owed, with interest, on every debt you want to replace, and compare it with the total repayable in the new loan's quotation. If the new total is lower, consolidation saves money. If it is higher, you are paying for a smaller instalment — sometimes worth it, but know the price.
What the law caps
An unsecured consolidation loan is an unsecured credit transaction under the National Credit Regulations. Interest is capped at 28.25% a year, the repo rate of 7.25% plus 21%, so the cap moves when the Reserve Bank changes the repo rate. The initiation fee may be at most R165 plus 10% of the amount above R1 000, never more than R1 050, and the service fee at most R60 a month, plus VAT on both.
A further advance on a home loan is a mortgage agreement, capped at 19.25% a year. The lower cap is real, but it spreads short-term debt over the years left on your bond and puts your house behind it.
Credit life insurance is often added to a consolidation loan. Section 106 of the National Credit Act lets you use a policy of your own choice instead of the lender's, and the premium belongs in your comparison of totals.
Affordability: the lender must say no if it does not fit
Sections 80 and 81 of the National Credit Act require every registered lender to check your income, your expenses and your existing debts before it lends. A loan granted to someone who clearly could not afford it is reckless credit, and a court can suspend or set aside the agreement.
That check works for you. If a lender will not consolidate your debts, the reason is usually that the new instalment would not fit your budget either — a sign to talk to a debt counsellor rather than to look for a lender with a looser check.
If your repayments are already too high
If you are missing payments, borrowing to pay other debts, or most of your salary goes to instalments, you may be over-indebted. Debt review under section 86 of the National Credit Act is the legal route: a debt counsellor registered with the National Credit Regulator checks your situation and negotiates lower payments, and a court or the National Consumer Tribunal makes them binding.
While you are under debt review no new credit is allowed except a consolidation agreement, and that goes through your debt counsellor. Our page on [loans under debt review](/debt-review-loans) explains what the law allows and how the review ends.
Comparing through RandScout
We list no lender that offers consolidation loans as a product of its own, and this page shows no short-term lenders: a loan repaid within weeks is the wrong tool for paying off other debts. The loan-matching services at the top of this page compare personal loans from several lenders, which is how most consolidation loans are found. RandScout is not a lender, we show no offers to anyone under debt review, and we never ask you for money.