Debt Counselling vs. Debt Consolidation: Which is right for you?
Managing debt can be a challenge, especially when you're dealing with multiple creditors and high-interest rates.
For South Africans, the burden of debt can be overwhelming, affecting everything from your credit score to your mental and emotional well-being.
Fortunately, there are options available to help you regain control of your finances and start on the path to financial freedom. In this article, we'll explore two popular options for managing debt: debt counselling and debt consolidation.
I'll provide an overview of each option, explain how they work, and help you determine which one is right for you based on your unique financial situation. So, whether you're drowning in debt or simply looking for ways to improve your financial health, read on to learn more about debt counselling and debt consolidation in South Africa.
Debt counselling in South Africa
What is debt counselling?
Debt counselling, also known as debt review, is a process designed to help individuals who are struggling to manage their debt.
It’s a formal, legal process regulated by the National Credit Regulator (NCR) in South Africa. The goal of debt counselling is to help individuals create a manageable repayment plan that takes into account their income and expenses.
How does it work?
When you enter into debt counselling, a debt counsellor will evaluate your financial situation and create a debt repayment plan that fits your budget. This plan will typically involve negotiating with your creditors to reduce your interest rates and extend the terms of your loans.
Once a repayment plan has been established, you’ll make a single payment to a payment distribution agency (PDA) which will then distribute the payments to your creditors on your behalf.
Who qualifies for debt counselling in South Africa?
Debt counselling is available to individuals who are struggling to manage their debt and meet certain criteria.
To qualify for debt counselling, you must have a regular income and be able to show that you are unable to meet your monthly debt obligations. You must also have at least one outstanding debt that is currently in arrears.
The advantages and disadvantages of debt review
Advantages of debt counselling include:
- Reduced monthly payments
- Protection from legal action by creditors
- A structured repayment plan
- The ability to retain your assets
Disadvantages of debt counselling include:
- Negative impact on your credit score
- The inability to take out new credit while under debt counselling
- The possibility of a longer repayment term, resulting in more interest paid over time
How much does debt counselling cost?
Debt counselling is not free and there are fees associated with the process. These fees are regulated by the NCR and include an application fee, a restructuring fee, and a monthly after-care fee.
The fees are based on a sliding scale and are calculated based on the amount of debt you have and your monthly income. It's important to note that these fees cannot exceed a certain limit set by the NCR.
An overview of debt consolidation in South Africa
What is debt consolidation?
Debt consolidation is the process of combining multiple debts into a single loan or payment. The goal of debt consolidation is to simplify the repayment process and potentially lower your interest rate, resulting in lower monthly payments.
How consolidation works
When you consolidate your debt, you take out a new loan or credit facility that is used to pay off your existing debts.
This leaves you with a single payment to make each month, which is often lower than the combined payments of your previous debts. The new loan may have a lower interest rate, which can help you save money in the long run.
The two primary types of consolidation
- Secured debt consolidation: This involves using collateral, such as your home or car, to secure the new loan. This can result in a lower interest rate but also puts your assets at risk if you are unable to repay the loan.
- Unsecured debt consolidation: This does not require collateral but often comes with a higher interest rate.
Would you qualify for debt consolidation?
Qualifying for debt consolidation depends on a few factors, including your credit score and income. To be eligible for a debt consolidation loan, you typically need to have a good credit score and a steady income.
If you have a poor credit score, you may still be able to consolidate your debt but may be subject to higher interest rates.
Advantages and disadvantages of debt consolidation
Advantages include:
- Simplified repayment process
- Potentially lower interest rates
- Reduced monthly payments
- Improved credit score if payments are made on time
Disadvantages include:
- Potentially higher interest rates if you have poor credit
- Risk of losing collateral if you default on a secured loan
- The possibility of extending your repayment period, resulting in more interest paid over time
The true cost of debt consolidation
The cost of debt consolidation varies depending on the lender and the type of loan you choose. Some lenders may charge application fees, origination fees, and prepayment penalties. It's important to shop around and compare offers from multiple lenders to find the best deal for your situation.
Debt consolidation isn’t “cheap”.
Taking out a personal loan, for instance with a lower interest rate but with a much longer term will generally mean you’ll pay more at the end of the day.
Factors to consider when choosing between debt counselling and debt consolidation
When deciding whether debt counselling or debt consolidation is the right option for you, there are several factors to consider:
The type and amount of debt
The type and amount of debt you have is an important factors to consider. Debt consolidation may be a good option if you have multiple debts with high-interest rates, such as credit card debt. Debt counselling, on the other hand, maybe a better option if you have a mix of secured and unsecured debt, such as mortgage debt and credit card debt.
Your specific financial situation
Your financial situation, including your income and expenses, is an important factor to consider. Debt counselling may be a better option if you are struggling to make your monthly payments and need help creating a budget.
Debt consolidation may be a better option if you have a steady income and are looking to simplify your debt repayment process.
What does your credit score look like?
Your credit score is another important factor to consider. If you have a poor credit score, you may have difficulty qualifying for a debt consolidation loan with a low-interest rate. In this case, debt counselling may be a better option.
Your goals and priorities matter too
Your goals and priorities should also be considered. If your goal is to improve your credit score, debt counselling may be a better option since it does not negatively impact your credit score in the same way that debt consolidation does.
If your priority is to simplify your repayment process and potentially lower your interest rate, debt consolidation may be a better option.
Availability and accessibility to solutions
Debt counselling and debt consolidation may not be available or accessible to everyone. Debt counselling is only available to individuals who are over-indebted and meet certain criteria. Debt consolidation may not be accessible if you have a poor credit score or do not have collateral to secure the loan.
Debt counselling and debt consolidation are two options available to South Africans struggling with debt. While both options have their advantages and disadvantages, the decision on which option to choose ultimately depends on individual circumstances.
Let’s review what we’ve covered in this post
Debt counselling involves working with a debt counsellor to create a debt repayment plan and potentially negotiate lower interest rates with creditors. Debt consolidation involves combining multiple debts into a single payment or loan, potentially resulting in a lower interest rate and simplified repayment process.
When deciding between debt counselling and debt consolidation, it's important to consider factors such as the type and amount of debt, financial situation, credit score, goals and priorities, and availability and accessibility.
If you’re struggling with debt, the most important step is to take action. Consider reaching out to a debt counsellor or financial advisor to help you create a plan for managing your debt.
It's also important to make a budget and stick to it, as well as explore options for increasing your income and reducing your expenses. Remember, getting out of debt takes time and effort, but it is possible with the right plan and mindset.