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Debt review and debt consolidation are personalised debt management solutions. The choice on which one to use and which one may be more beneficial, is dependent on your personal debt situation.
Ask yourself the following questions to figure out which one suits you:
1. Are you experiencing financial problems?
2. Are you struggling with debt and loan repayments?
3. Are you accounts in arrears?
If you have answered yes to at least one of the above questions, then either debt counselling or debt consolidation may be the answer for you. Deciding which one is better, is generally the hard part.
Understanding the difference between debt counselling and debt consolidation loans will help you make the best financial decision for yourself and your family.
Here we will break down the two most researched debt relief options to make sure you make the right choice.
Debt Counselling
The debt counselling (also known as debt review) process was introduced in 2007 by the National Credit Regulator.
From 2007 to 2012 the NCR decided to move quickly in order to protect the millions of consumers who were being left to fend for themselves. Many lost everything due to being unable to afford their debt every month. Their solution was to put in place a debt relief process called debt review/debt counselling.
The goal was to help over-indebted South Africans who are unable to pull themselves out of a debt trap.
Debt review legally protects consumers from losing important assets such as their home or car, which would essentially leave them in a worse position than before.
This as a formal debt rehabilitation programme that makes it easier to clear your debts by lowering your monthly payments, as well as the interest you pay on them.
This process usually takes about three to five years and during this period, you aren’t allowed to use your credit cards or take on any more debts.
If you sign up for debt counselling, you will be assigned a debt counsellor who will reach out to your creditors. They will negotiate lower interest rates and smaller repayment amounts.
The benefits of debt counselling include being able to rest assured that a debt expert will assist you with your debt, and your creditors will no longer be able to take legal action against you or contact you directly.
On the other hand, you won’t be allowed to access any new credit until the debt counselling process is concluded and your debt is settled. There will be a note on your credit report, stating that you’re under debt counselling.
There are many benefits to debt counselling/debt review:
- Your monthly budget will help you meet your basic needs every month so that you can afford your debt repayments.
- Your debt counsellor will suggest ways of saving money and cutting costs.
- All debt repayments will be consolidated into one reduced affordable monthly repayment. This means that you will only have one debit order for your debt repayments each month.
- You will no longer be harassed by your credit providers demanding payment – These calls will now go to your debt counsellor.
- All your assets such as your home, vehicle and furniture will be protected from repossession.
- Your debt counsellor can investigate reckless lending on your behalf to see whether the debt was granted to you legally.
- Debt counselling provides you with peace of mind by knowing your debt repayments are being covered each and every month.
Like any option, there’s disadvantages to debt counselling too:
- You can’t apply for new credit – Once placed under debt review, your credit profile will be flagged at the credit bureaus and you will not be granted any more credit.
- It involves fees – The legal fees you will be charged includes a consent order fee. This confirms your commitment to the new repayment plan that your debt counsellor will draw up for you. These fees don’t cut into your normal living costs though.
- It’s possible that not all your debts can be covered – If one of your credit providers has already commenced legal proceedings against you as a result of defaulting, your debt counsellor will not be able to include these debts into your new debt repayment plan.
This option is right for you if:
You are already at odds with your creditors. You would likely have been contacted by collectors, who will have warned you about the legal implications of missed payments.
If you’re unsure which option is right for you, it’s best to chat to a financial adviser or a debt counsellor about your options.
Debt Consolidation loans
Debt consolidation is the process of paying off multiple debt accounts with a new loan.
You will be in debt for longer as they extend the term and still charge interest on the consolidation loan.
The process of consolidating debt with a personal loan involves using the funds from the loan to pay off each individual loan. Lenders pay off loans on behalf of the borrower.
Keep in mind that a consolidation loan only covers unsecured debt such as personal loans, credit cards and store accounts. This is seen as a high-risk debt consolidation loan.
If you are over-indebted with multiple debt accounts, a consolidation loan from a consolidation company may seem like an ideal solution.
But debt consolidation loans have high interest rates and admin fees which might land you in the more financial struggle than you think. Getting another loan will not bring you financial relief. Instead, it gives you one instalment, at a higher interest rate and extended term.
If your credit score isn’t looking great be prepared to cough up an extra in interest every year for your consolidation loan.
How does a debt consolidation loan work? Below, we unpack how you can benefit:
- You can combine several creditors, all with their own terms, monthly fees and interest rates, into one easy-to-manage payment.
- Depending on your debt, you could save some money because one monthly repayment at a favourable interest rate is more affordable than several payments with varying interest rates.
- You can settle several debts and only have one loan instead.
- Settling your debts helps to improve your credit record. (Read more: How to improve your credit score)
- Less stress. It allows you to deal with only one institution, rather than multiple creditors asking you for payment.
Although debt consolidation has its advantages, there are some disadvantages you need to consider:
- Your total interest payments may be high – Because debt consolidation loans allow you to pay off your debts over a longer period of time, you may end up paying more in the total interest payments.
- Your debt stays the same – If you’re over-indebted, this option does not reduce the amount of debt you have, it simply puts them all together into one consolidated amount that allows you to pay one single payment.
- It’s not for everyone – Because consolidation loans are a type of debt, you would need to apply for a consolidation loan. Based on a financial institutions’ varying internal rules, it may or may not be approved. If you have an unhealthy credit record and can’t afford to make regular payments, your debt consolidation loan application may be rejected.
This option is right for you if:
Debt consolidation is a good option if you are struggling to make minimum payments and just want a little breathing room – lower monthly instalments. But this solution requires you to have a credit score good enough to qualify for a debt consolidation loan. And, like debt counselling, debt consolidation will cost you.
The lower monthly instalments achieved by debt consolidation are only possible because your loan term is extended. This increases the period over which you pay interest and makes your debt more costly. So you should only ever extend your loan period as much as is needed.
Although you will be paying a lower monthly instalment on your debt, the high-interest rate involved with a consolidation loan means you will pay more over time!
Platform such as Debt Rescue have helped thousands of South Africans through the debt counselling process. Before you decide to take a consolidation loan, chat with one of their consultants to see if this is a viable option for you first.
Debt Rescue is the number one debt counsellor in South Africa and has assisted thousands of consumers with their debt, providing them with immediate financial relief.
Or maybe you are not interested in getting a consolidation loan, you can try a No Loan Consolidation offered by platform such as Debt Safe.
Debt safe consolidates your debt into one affordable repayment – without a loan. Nice right!
Make sure before you commit to anything you do your own research and see what works for you.
Some times you might want to do it yourself and you can. There are many ways you can do so such as enrolling for a free debt course how to pay off your debt right here on money unscripted.
If you are struggling with a large amount of debt, do your shopping to compare and consider the debt relief options available to you.
Keep in mind that nothing changes overnight and that know that you have taken the first step to get out of debt. There only thing you are left with is to execute.
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