Different ways to consolidate your debt
When you hear the term “consolidating debt”, you might assume it refers to a debt consolidation loan.
DebtSafe’s debt expert, Matthys Potgieter, says: “Many consumers don’t know the difference between a consolidation loan and consolidating debt through debt review.”
Potgieter explains both concepts and encourages over-indebted consumers to make an informed choice.
What is debt review? Debt review, also known as debt counselling, is a process in terms of the National Credit Act for consumers who cannot adhere to their loan agreements and are in arrears with their payments.
Who can apply for debt review? Over-indebted consumers who cannot apply for a consolidation loan can qualify for debt review.
What should you know about debt review? The debt review process includes all the benefits of a consolidation loan, as well as:
• You save more money, because the instalments are reduced by up to 60%.
• You are educated on how to manage your finances better in future and avoid becoming over-indebted again.
• Once you have completed the debt review process and have paid off your debt, you receive a clearance certificate and a clean credit record.
Although a debt consolidation loan may seem like a better way to manage debt, it is often difficult to get one.
Potgieter therefore recommends consolidating debt through debt review.
What is a consolidation loan? It is a credit agreement offered to a consumer with the aim of settling existing (usually unsecured) debt, such as a personal loan, store credit or a credit card. Several outstanding debts are consolidated into a single loan.
Who can apply for a consolidation loan? The criteria are high for a consumer to be approved for a consolidation loan. You have to be a so-called “A+ student” who manages his or her debt well. This is ascertained via a strict affordability check.
You need to be able to pay off the consolidation loan and your other loans. Thus, over-indebted consumers who are in arrears with payments or unable to afford their current debt repayments, will not qualify for a consolidation loan.
What should you know about a consolidation loan?
• You have to pay high interest rates and administration fees.
• You don’t always save on the monthly payment.
• The 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.
• You can end up financially worse off. By extending the loan term, you will pay more in interest.
• A consolidation loan does not protect your assets from being repossessed.
When it comes to debt consolidation, it is important to be aware of the advantages and disadvantages before you take on new debt.
Debt consolidation involves taking out a new loan to pay off multiple debts or credit card balances.
The main benefit of debt review is that it protects your assets from being repossessed by credit providers.
The disadvantage is that you cannot apply for any credit while you are under debt review, and the only way to exit debt review is to settle your outstanding debts, except for those related to vehicle and home financing.