When managing debt, many individuals often confuse the concepts of a consolidation loan and consolidating debt through debt review. To clarify these options and help severely over-indebted South Africans make informed choices, here are some valuable insights into each approach.
A consolidation loan is a credit agreement designed to settle existing unsecured debts, such as personal loans, store credit, or credit card balances, by combining them into a single loan. While it may appear to be an attractive solution, a consolidation loan has stringent eligibility criteria.
Who Qualifies for a Consolidation Loan?
To be approved for a consolidation loan, a consumer must have a commendable track record in managing debt, akin to being an ‘A+ student.’ Creditors conduct a comprehensive affordability assessment to determine this requirement. Unfortunately, severely over-indebted consumers already struggling with payments or in arrears with their payments are unlikely to qualify for this option.
Key Points to Note about a Consolidation Loan
- High-Interest Rates and Admin Fees: Consumers using a consolidation loan often have to cope with higher interest rates and administrative fees, potentially increasing the overall repayment cost.
- Potential Limited Savings: Contrary to expectations, monthly payments might not always decrease significantly, offering limited relief.
- Extended Loan Terms: Consolidation loans typically come with lengthy repayment terms, which depend on the loan amount, leading to prolonged debt settlement.
- Short-Term Fix: Recognising that a consolidation loan offers a short-term fix but may not provide a sustainable, long-term debt solution is essential.
- Potential Debt Increase: In some cases, consumers who do not use the loan to settle existing debts might face an increase in debt, as the funds are paid into their accounts rather than directly towards the listed accounts.
- No Legal Asset Protection: A consolidation loan does not offer legal protection for a consumer’s assets, like their home or vehicle, against repossession.
Consolidation Through Debt Review
Debt review, or debt counselling, is a legal process regulated by the National Credit Act. This service is intended to aid South Africans who are dealing with overwhelming debt and require assistance in fulfilling their financial obligations.
How is debt consolidated through this process?
Debt review consolidates debt by following a structured legal process regulated by the National Credit Act in South Africa. When a consumer enrols in debt review, a registered debt counsellor assesses their financial situation comprehensively. The counsellor negotiates with creditors on the consumer’s behalf to restructure the debts into a single, more manageable repayment plan.
During debt review, the consumer makes a single monthly payment to a Payment Distribution Agency (PDA), which then distributes the funds to the various creditors according to the agreed-upon plan. The debt counsellor strives to reduce monthly instalments and extend the repayment period to make it affordable for the consumer.
As a result, the consumer can regain control of their financial situation and work towards becoming debt-free in a more manageable and responsible manner.
Who Qualifies for Debt Review?
Debt review is ideal for severely over-indebted consumers who do not qualify for a consolidation loan and receive a steady monthly income.
Key Points to Note about Debt Review:
- Substantial Savings: Consumers can significantly reduce up to 60% in their monthly instalment payments through their debt review.
- Financial Education: Debt review through DebtSafe empowers consumers with debt management knowledge to avoid falling back into debt.
- Clearance Certificate: Upon completing the debt review process, consumers receive a Clearance Certificate and a fresh start with a chance to rebuild a favourable credit record.
- Legal Protection: Debt review offers immediate protection against asset repossession and creditors taking legal action.
While a consolidation loan may seem appealing, obtaining one can be challenging for severely over-indebted individuals. Therefore, for those facing severe over-indebtedness, consolidating debt through the debt review process emerges as a safer and more effective journey towards achieving financial freedom. Debt review provides essential legal protection, substantial savings, and an opportunity to build a more secure financial future, making it a preferred option for those in dire financial straits.