Debt Consolidation vs. Debt Review

Debt Consolidation vs. Debt Review

When you feel like you can’t handle the burden of debt management, you’ll encounter two options commonly available to South Africans: debt consolidation and debt review.

Which of these two is suitable for your situation?

What is Debt Consolidation?

When you take a debt consolidation loan, all your debts will be combined into one large loan. The creditor will repay all your debts and in return, you’ll just have to deal with the single new loan they’re offering.

In short, instead of worrying about multiple loans, you’ll just think about a single loan to repay.

Consolidated loans often have lower rates but have extended payment periods. For instance, instead of repaying all your loans within 24 months, you’ll have to do it in 48 months for the consolidated loan.

Debt consolidation can last from 3 to 5 years, depending on the amount of debt you have and the preferred terms.

The biggest risk in taking a debt consolidation loan is trapping yourself into deeper debt. Although monthly repayments are lower, the longer term can put you in trouble in the future. It might look like you’re saving money because of the lower interest rates, but consolidated loans will cost you more over the extended term period.

The lower monthly installments might also give you a false sense of security. It’s easy to overspend because you’ll feel like you’ve settled your debts. Having lower monthly repayments reinforce this idea, tempting you to spend more than needed.

Not everyone can qualify for debt consolidation. You can’t apply for it just because you want to get lower monthly repayments and avoid the hassle of dealing with individual creditors every month.

To qualify for debt consolidation, you need to have a good credit rating and repayment history. Repeatedly missing out on repayments is a bad sign for creditors and you’ll less likely to get accepted for a consolidation loan. 

Pros

  Lower interest rate compared to existing rates from individual creditors

  One monthly repayment to worry about

  No impact on your credit score

Cons

  Longer repayment period means you’re paying more in the long run

  Interest rates may look more affordable, but you’ll be dealing with them for a long time

  A false feeling of security can tempt you to spend more than needed

 

What is Debt Review?

Cases wherein creditors threaten overindebted South Africans with legal actions aren’t unusual. Many who don’t know about the protection that debt review can give just submit to the forceful method of creditors, and this just leads them to more debt. Because of this, the South African government designed a program to protect over-indebted citizens from further committing financial mistakes.

Debt review, also known as debt counselling, is a measure enforced under the National Credit Act (NCA) to help South Africans avoid being blacklisted by banks. It’s designed for those who are struggling with their finances and are having trouble juggling too much debt.

While you’re under debt review, you’ll be given a more affordable repayment plan that matches your financial capability. You’ll also be taught how to manage your money better to make sure you won’t encounter the same problem again in the future.

During the debt review period, you won’t have to worry about dealing with multiple credit providers to whom you’re indebted to. You’ll just deal with a single payment distribution agency that will take care of paying all creditors on your behalf.

Overall, debt review is generally the safer and more effective route to take to be able to comply with debt repayments. 

If you repeatedly fall behind payments and your debts just keep on piling on top of the other, it’s time to seek help from a debt counsellor and undergo a debt review. These counsellors will guide you through the legal process and do their best to solve your debt problems.

To qualify for a debt review, you must be over-indebted and unable to meet your repayment obligations on time. You or your partner must also have a stable source of income so that the counsellors will have a reasonable basis for negotiating lower rates on your behalf.

Pros

  You get restructured debts that are easier to pay

  Debt counsellors will take over the negotiation with credit providers to help you get lower rates and reduced repayment terms

  You get legal protection from being pestered by credit agents

  You won’t be blacklisted while you’re under the debt review process

Cons

  You may not qualify for debt review if the counsellor finds that you’re not over-indebted

  You can’t apply for new credit while undergoing the process

  Not all debts can be covered by debt review

  There’s a debt counselling fee you must add to your repayment plan

  

Which One Should You Take?

If you’re having trouble dealing with multiple creditors, and you’re not behind regular repayments, you can consider taking a debt consolidation loan. This may give you peace of mind because you’ll just be worrying about repaying a single loan.

However, if you’re having financial trouble that you can’t keep up with repayments, it’s best to undergo a debt review program. While under the debt review process, you’ll have more breathing room to deal with your debts and avoid putting yourself into more debt.

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