“Many consumers don’t necessarily know the difference between a consolidation loan and consolidating debt through debt review,” says Matthys Potgieter, spokesperson and debt expert at DebtSafe. When individuals hear ‘consolidating debt’ many automatically assume it refers to a ‘debt consolidation loan’ and that is why DebtSafe wants to set the record straight.
Potgieter sheds light on both concepts and encourages over-indebted consumers to make an insightful and educated choice to get rid of their debt.
What is a Consolidation Loan?
A consolidation loan is a credit agreement that is offered to a consumer with the idea to settle existing (usually unsecured) debt like a personal loan, store credit or a credit card. Taking the several outstanding debts and consolidating them into one single loan.
Who can apply for a Consolidation Loan?
First of all, the criterion is very high for a consumer to be approved for a consolidation loan. The consumer considering a consolidation loan has to be a so-called ‘A+ student’ that manages his or her debt well. This is confirmed via the strict affordability check. The consumer needs to be in a position to pay off the consolidation loan as well as his/her other debt instalments. Thus, over-indebted consumers that are in arrears with payments or unable to afford their current debt repayments, will not qualify for a consolidation loan.
What are the necessary good-to-knows of a Consolidation Loan?
- Consumers have to keep up with high-interest rates and admin fees.
- Consumers don’t always save on the monthly payment.
- Loan terms are usually long. The term depends on the loan amount.
- It is a short-term fix and not a sustainable solution in the long run.
- A consumer can be in a worse-off position because of a consolidation loan. By not using the loan for existing debts, the consumer’s debt increases as many credit providers opt to pay the funds into the consumer’s account rather than settling the accounts listed by the consumer themselves.
- A consolidation loan offers zero legal protection of a consumer’s assets against repossession.
What is Debt Review?
Debt Review – also known as debt counselling – is a legal process that has been appointed by the National Credit Act as a debt solution to South Africans who are unable to meet their debt agreements, ending up in serious arrears with their payments.
Who can apply for Debt Review?
Over-indebted consumers that cannot apply for a consolidation loan can apply for debt review.
What are the necessary good-to-knows of Debt Review?
The debt review process includes all the benefits of a consolidation loan as well as the following:
- The consumer saves much more because instalments are reduced by up to 60% through the debt review process.
- The consumer gets educated during the process to manage his/her finances better in future and to avoid the debt pitfall again.
- When a consumer completes the debt review process and paying off all his/her debt, he/she receives a Clearance Certificate and clean credit record to start a financially free chapter in their lives.
Although a debt consolidation loan may seem like the preferred debt management solution or choice by various consumers, it is in most cases tricky to get one. Potgieter therefore recommends consolidating debt through the debt review process as it is the safer journey in becoming debt free.