Debt counselling has both pros and cons
Relief will be short-lived if you don’t fundamentally change your financial behaviour
As the bad economy bites into household earnings and the cost of living continues to rise, many people are turning to debt review or debt counselling.
Debt counselling is a key feature that the National Credit Act introduced from 2007. The intention of this section was to assist consumers who were over-indebted and would otherwise be blacklisted or have their goods repossessed.
When your debt becomes too much to manage on a monthly basis as payments become due, there are generally two broad interventions you can take. The first is to apply for a debt consolidation loan through a regulated financial provider.
As we explained in last month’s column (Sowetan Money July 12 2019), debt consolidation is when you combine your debt accounts into a single loan with a single interest rate. Your debts are paid off by the financial institution providing the debt consolidation product, leaving you, the consumer, with one loan account to pay off.
A key benefit of this intervention is that it can reduce your financial pressure by lowering your monthly repayments. However, these loans often result in you paying back a higher amount in total compared to when you have multiple debt accounts as the repayments are spread over a longer term.
The second option available to you if you are over-indebted is to undergo debt counselling and get a registered debt counsellor to help you manage your debts.
Simply put, debt counselling is when a debt counsellor helps you negotiate the extension of the terms of the repayment of your debts. Ideally you should go into debt counselling before you default on any of your accounts, but many people who go into debt counselling have already defaulted (when you are three months or more late paying an account).
There is no shame in seeking this kind of help, especially as your circumstances will always be unique. But if you decide to apply for debt counselling, there are a number of pros and cons that you should be aware of.
The pros of debt counselling include the following:
- Your repayments will be rearranged and this will typically result in a lower total monthly repayment across your debt accounts. This will provide you with much needed breathing room in your finances.
- Your assets cannot be repossessed by those you owe money, while you are undergoing this process as long as you do not default on the new payment arrangement.
The cons include:
- Once you are under debt counselling, the counsellor handling your case would notify credit bureaus across the country.
- You cannot apply for additional credit while under debt counselling. This measure is to protect you and any creditors against you getting yourself indebted further.
- Some creditors may not agree to the debt counsellor’s proposed payment arrangement. For example, if you have already defaulted on one of your debts (and are currently paying via a court-determined arrangement), the debt counsellor would not be able to included this account in the process.
- Because the debt counsellor is offering a service, you must pay an application fee and debt review fees.
South Africa has millions of consumers who are indebted but do not earn a salary. Unfortunately, if you are one of them, you won’t be able to apply for debt review as you need to earn a regular income to qualify.
While there are various options available to help you tame your otherwise unmanageable debts, none of these are a silver bullet. If you don’t fundamentally change your financial behaviour, any debt consolidation or debt counselling process will only offer temporary relief.
Should you decide to undergo debt counselling, make sure that the debt counsellor that you choose is registered with the National Credit Regulator (www.ncr.org.za).
- Siwundla holds the financial risk manager qualification and is the investor relations and product analyst at CoreShares.