Debt Review vs. Debt Consolidation: Choosing the Right Option for Financial Freedom
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As the New Year inspires South Africans to reset their priorities, many are focusing on tackling debt and achieving financial stability. With debt review and debt consolidation emerging as common options, understanding their differences is crucial to making an informed decision.
What is Debt Review?
Debt review is a legal process designed to assist over-indebted consumers in regaining control of their finances. According to Lebo Gaoaketse, Head of Marketing and Communication at WesBank, debt review involves a registered debt counsellor assessing the applicant’s financial situation, negotiating with creditors for reduced payments, and restructuring debt into a manageable repayment plan.
Once approved, the repayment plan becomes a court order, protecting consumers from legal action as long as they adhere to the agreement.
Advantages of Debt Review
- Reduced monthly payments: Debt counsellors negotiate lower instalments, improving cash flow.
- Legal protection: A court order mitigates the risk of legal action from creditors.
- Single payment: Payments are consolidated and distributed by a Payment Distribution Agency (PDA).
- Lower interest rates: Debt counsellors may negotiate reduced interest rates, saving money in the long term.
Disadvantages of Debt Review
- Additional fees: Counsellors charge fees that can add to the total debt.
- Lengthy process: Depending on the debt amount, the process can take years.
- No new credit: Consumers cannot enter new credit agreements while under review.
- Court binding: Failure to adhere to the repayment plan can result in legal consequences.
What is Debt Consolidation?
Debt consolidation involves taking out a single large loan to settle multiple smaller debts, such as credit cards and store accounts. This simplifies debt repayment by combining debts into one manageable payment.
Sebastien Alexanderson, Head of National Debt Advisors, notes that while convenient, consolidation loans in South Africa carry interest rates ranging from 18.25% to 28.25%, which can lead to higher overall costs if the repayment term is extended.
Advantages of Debt Consolidation
- Simplified payments: Managing one monthly payment is easier than juggling multiple debts.
- Lower interest rate: Depending on the loan, consumers may benefit from reduced interest rates.
- Improved credit score: Clearing smaller debts can enhance the credit utilisation ratio, positively affecting credit scores over time.
Disadvantages of Debt Consolidation
- Higher overall cost: Extending repayment terms can increase total interest paid.
- Financial discipline required: Continuing to spend on cleared accounts can lead to deeper debt.
- Root problem unaddressed: Consolidation simplifies payments but doesn’t tackle the underlying causes of over-indebtedness.
Impact on Your Credit Record
Both options have implications for credit scores and records.
- Debt Review: Consumers under debt review are listed with credit bureaus, negatively impacting credit scores and making it harder to access new credit.
- Debt Consolidation: Taking out a new loan may initially lower credit scores due to credit inquiries and higher utilisation. However, consistent repayments can improve scores over time, while missed payments can harm them further.
Which Option is Right for You?
Choosing between debt review and debt consolidation depends on your financial situation:
- Debt Review is ideal for those who are over-indebted and unable to meet current obligations. It provides legal protection and a structured plan but comes with restrictions.
- Debt Consolidation suits consumers with manageable debt who want a simplified repayment process but require discipline to avoid falling into deeper financial trouble.
Both paths require careful consideration, financial discipline, and commitment to achieving long-term stability. Consulting a registered financial advisor or debt counsellor is essential to selecting the best course of action for your needs.
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