If you are interested in pooling all your debt - to give you better control over what you owe and to pay a lower interest rate - a debt consolidation package may be for you.
Absa is the latest financial institution to offer a debt consolidation product with the launch of the Absa One account, which has an an added advantage in that you can have a transactional facility on the account.
Brendan O'Donnell, managing executive of Personal Financial Services at Absa, says the new product consists of two accounts - a loan facility, which is secured by one or more residential properties and any other security, and a cheque account. The cheque account must be a personal and not a business account. The loan account can be opened in the name of a close corporation, company or trust. But if the account is held through a close corporation, company or trust, the structure of the interest rate may vary.
To qualify for the Absa One account you need a minimum residential bond of R400 000. You need not make use of the full amount but the value of your property must be at least R400 000. You must also earn a pre-tax income every month of R30 000 or more and must have assets of at least R250 000.
Provided you meet these criteria, up to 80 percent of the value of your property can be funded at 12.5 percent which is two percentage points below the base mortgage bond rate of 14.5 percent. The remaining 20 percent and any additional amount which is secured by policies or share portfolios would be given to you at 13 percent. Any portion of the facility that is unsecured would be funded at the prime rate of 14.5 percent.
Also, any credit balance in your current account is automatically set off against the debit balance in the loan account, so you pay interest only on what you actually owe. You earn an effective rate on a credit balance in your current account equal to the rate you are charged on your loan account.
Weller says this amounts to a substantial saving for you. For example, if you maintain an average credit balance of R10 000 in your current account and have an outstanding loan facility of R500 000, you will save yourself about R1 450 in interest charges a year, based on the prime rate of 14.5 percent.
Another feature is the option of a "sweeping" facility. This allows you to manage your account so you always have sufficient funds in your cheque account. When the balance falls below a level set by you, funds will automatically be "swept" from the loan account to restore the balance. Your cheque and debit orders will always be honoured and you will always have access to funds from an ATM.
You can use an Absa credit card linked to your cheque account for ease of payment. The sweeping facility does not apply to the credit card. You should not use the budget facility on your credit card because the interest rate is much higher than what you pay on your loan account. Credit card interest rates on debit balances are around 23 percent a year.
There is a management fee of R100 on the Absa One account if you do not have the sweeping facility and R120 if you opt for the sweeping facility. Other banks that offer debt consolidation facilities include BoE, Investec Bank and Origin.