The Difference between Debt Review and Debt Consolidation

You may have considered debt review or debt consolidation, if you are struggling to pay your monthly instalments on your car finance, retail cards, personal loans and credit cards. But do you know the difference between these debt relief solutions? Many people still seem to be confusing the two.

Debt Consolidation

Debt consolidation involves taking out one big loan and using it to repay your smaller debts. It may seem sensible to combine your debts, as it makes more disposable income available to you. But what you don’t know is debt consolidation has far more pitfalls than it does perks. If you find it hard to control your spending it can make your situation considerably worse. It is far too easy to relapse into the debt trap, once you are under the illusion that your debt is under control.

Reduced payments and a longer repayment term may seem like a great idea, but what’s to stop you from taking out more credit? Also, in the long run, you’re going to end up spending a lot more on your debt than if you paid it off sooner. Moreover, if you have a poor credit score – which you are likely to have if you are seeking debt relief – you won’t be offered a good interest rate on a debt consolidation loan. So, you may very well pay more every month overall, after taking out a big loan to cover your little ones.

Debt Review / Debt Counselling

The legal process outlined in section 86 of the National Credit Act (NCA) will determine whether you are eligible for debt review – otherwise known as debt counselling. However, there are implications to undergoing debt review and you need to take these into consideration. You won’t be able to take out any more credit while under debt counselling, as your name will be flagged at the credit bureaus. However, this may be the best thing for you. If you are already struggling, taking out more credit will put your assets at risk of being repossessed.

First of all, you will need to approach a debt counsellor to assess your finances to see whether you are over-indebted. National Debt Advisors (NDA) is a professional debt counselling firm registered with the National Credit Regulator (NCR) that comes highly recommended. You can get in touch with NDA via their online contact form.

Visit the NDA website to find out more about – “What Is Reckless Lending”

If your debt counsellor finds that your expenses exceed your income, this will mean you are over-indebted. Your debt counsellors will also investigate whether or not any of your credit providers are reckless lenders. Reckless lending entails extending credit to borrowers who can’t afford to repay it. Once you are found to be over-indebted, your debt counsellor will notify your credit providers and the credit bureaus that you are under the protection of debt review. And for 60 days thereafter, your credit providers won’t be allowed to institute legal action against you for.

Maintain Your Financial Health

Your debt counsellor will then go through your finances with you to establish how much you can afford to repay each month, without cutting into your basic living expenses. Your debt counsellor will then propose this new monthly repayment plan to all of your credit providers. They will explain to them that it’s all you can afford right now and that it will guarantee them repayment. It’s unlikely your credit providers will reject this new repayment plan, as long as it’s reasonable – and your debt counsellor will see to this.

Thereafter, it’s up to you to keep up your end of the deal – by making absolutely sure you make your new, lower payments on time and in full every month. Missing just one payment will terminate the debt review process, which means credit providers can take legal action against you again. Entering debt review will involve once-off costs, like a R50 application fee and a maximum restructuring fee of R6000 (excluding VAT). The month after these fees have been paid, an after-care fee will be deducted monthly for 24 months. This fee will be 5% of your monthly instalment and no more than R300 (excluding VAT). After which time, it will drop to 3% until you settle your debt in full.

Benefits Outweigh Fees

You shouldn’t worry about these fees though, as your debt counsellor will ensure that you can afford them. These fees will be included in your new, more affordable monthly instalment. The most important thing to remember is that, once you are under debt review, your credit providers won’t be able to take you to court to get a judgment against your name. In which case, they could repossess and auction off your car and home. Or they could obtain a garnishee or emolument attachment order against you. This would allow your credit providers or their debt collectors to take away a large portion of your income every month directly from your employer.

The best thing to do is to take action as soon as possible before your situation spirals out of control. If you are struggling in the least bit to make your monthly payments, it’s advisable you get in touch with a reputable debt counsellor such as NDA today.