This article explores the key differences between debt review and debt consolidation, two popular options for South Africans struggling with debt. It delves into the benefits and drawbacks of each approach, providing a comprehensive guide to help individuals make informed financial decisions.
South Africa ns are often faced with the daunting task of managing debt, especially as the new year approaches and financial resolutions take center stage. Navigating the options for debt relief can be confusing, with two common paths emerging: debt consolidation and debt review . Understanding the nuances of each approach is crucial for making informed financial decisions.
Debt review, as explained by Lebo Gaoaketse, Head of Marketing and Communication at WesBank, is a legal process designed to help over-indebted consumers achieve financial freedom. The process begins with a registered debt counsellor assessing the applicant's financial situation. This counsellor then negotiates with creditors on behalf of the applicant, seeking reduced monthly payments and restructuring the debt into a more manageable repayment plan. The resulting plan is then made a court order, effectively shielding the individual from legal action by creditors. Debt review offers several benefits, including reduced monthly payments, protection from legal action, a single consolidated monthly payment, and the potential for lower interest rates. However, it's important to note that creditors may not always be legally obligated to halt their pursuit of repayments during the debt review process, particularly if legal action was initiated before the debt review commenced. Therefore, diligently adhering to the repayment plan is vital. Debt review also comes with some drawbacks, such as additional fees charged by debt counsellors, a potentially lengthy process that can span several years, and a restriction on entering into new credit agreements (except in specific circumstances). Furthermore, the repayment plan becomes a court order, legally binding the individual to its terms. Failure to comply can result in further legal action.Sebastien Alexanderson, Head of National Debt Advisors, sheds light on debt consolidation, describing it as taking out one large loan to settle multiple smaller debts, such as credit cards, store accounts, and personal loans. An example he provides is someone with four store accounts totaling R80,000 consolidating them into a single loan. While this simplification of payments appears appealing, it's crucial to be aware that interest rates on consolidation loans in South Africa can range from 18.25% to 28.25%. This can lead to higher overall costs, especially if the repayment term is extended.Debt consolidation offers advantages like a single monthly payment, the potential for a lower interest rate, and an improvement in credit utilisation ratio by reducing balances on credit cards or closing smaller debts. These factors can positively impact credit scores over time. However, the benefits of lower monthly payments often hinge on the interest rate and repayment period. Extending the loan term might reduce the monthly payment but could ultimately cost more in the long run.Both debt review and debt consolidation present their own challenges. While debt consolidation simplifies debt repayments, it doesn't address the underlying issue of over-indebtedness. Success with debt consolidation requires financial discipline; if spending habits don't change, individuals could find themselves back in debt. Gaoaketse points out that entering debt review will negatively impact credit records and credit scores. Listing under debt review with credit bureaus can make obtaining new credit more difficult and may result in higher interest rates charged by creditors. Alexanderson adds that taking out a new loan might initially lower credit scores due to credit inquiries and increased credit utilisation. However, consistently making on-time payments and avoiding additional debt can lead to credit score improvement over time. Conversely, missing payments on a consolidation loan can severely damage credit. Ultimately, the choice between debt consolidation and debt review depends on individual circumstances and financial goals. Carefully weighing the advantages and disadvantages of each option is essential for making a well-informed decision that sets individuals on the path to financial stability and freedom
Debt Review Debt Consolidation Financial Advice Credit Score Debt Management South Africa
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