Guide to debt rehabilitation solutions
What you will learn in this guide:
In this guide you’ll gain an understanding of the various debt solutions available to you – the qualifying criteria, the process, and the differences between the various solutions.
- Debt consolidation
- Debt counselling
- Debt settlement
- Qualifying criteria
- What will happen when you apply?
Personalised debt rehabilitation was introduced by the National Credit Regulator (NCR) as a debt relief measure to help over-indebted South Africans.
While this may be known to you, understanding the difference between the various debt solutions and what they offer you, may be confusing.
Tip: Are you struggling to manage your debt load? If so, we can help. Here’s how.
Here’s a breakdown:
Debt consolidation simplifies your finances by replacing multiple debt repayments with a single payment. This is done by taking out an additional loan to pay off your debt.
This method frees up cash instantly, and sometimes saves you money. This is also among the most popular when it comes to debt relief because it’s not flagged on your credit profile and still leaves you able to access further credit.
While taking out a new loan can seem contradictory to the process of eliminating debt, this is one of the most cost-effective solutions if planned correctly.
It’s also a massive help for those who are plagued by incessant creditor calls, which in some cases may border on harassment. Taking out a debt consolidation loan can assist by ensuring that you no longer have creditors hounding you as you’ll have consolidated your debt.
There are different types of consolidation loans available, but the most common include:
1. Home loan
Financial experts often advise that you should consolidate your debt using your home loan, should you have one. This is because the nature of a home loan typically boasts cheaper interest rates than short-term loans which make repayments cheaper.
2. Personal loan
Here your interest rate is completely dependent on your credit score. This is a solution mostly offered for non-homeowners, and commonly offered by traditional financial services such as the various banks.
But due to the NCR being stricter with these institutions about reckless lending it’s not a service many list or advertise. But with the correct advice it can work well.
3. Secured loan
Unlike in the case of a personal loan which is categorised as an unsecured loan, a secured loan boasts a low interest rate. This is because a secured loan is backed by collateral such as a vehicle or a house.
You’re essentially securing the loan by attaching an asset to it. This greatly reduces the risk to the lender which is why you’re able to access a reduced interest rate. But it’s vital that you’re able to make the repayment otherwise you risk losing your assets.
Often confused with debt consolidation this form of debt rehabilitation focusses on remedying your debt through restructured debt management without the use of a loan.
This plan is aimed at protecting your assets and offering instant cash relief while affordably servicing your debt.
Unlike with debt consolidation this programme caters to indebted consumers who’re struggling to make ends meet and whose credit reports don’t allow them to access further credit – meaning they’re unable to take out a consolidation loan.
Due to common misconceptions this debt solution has carried a bad name because of the belief that it negatively affects your credit health. But according to experts this isn’t true.
Once entered into the debt counselling process this is flagged on the consumers credit profile. This means that the consumer is unable to access further credit for the duration of the programme. While this may seem limiting, it’s in your best interest as the purpose of the programme is to clear your current debt.
Once the consumer has completed the programme and is debt free, the flag is removed from your profiles and you’ll able to access credit again.
The benefits of debt counselling include:
- You receive expert assistance: If you’ve chosen to pair with a reputable and trusted debt counselling company you’ll receive access to a debt counsellor who’ll assist you through the process.
- Budgeting assistance: For many consumers who find themselves in need of debt counselling the skill of effective budgeting is lacking. However, through the debt counselling process a debt counsellor will show you how to budget efficiently and adapt a healthy money management plan for your financial future.
- Creditors are handled: A typical by-product of being overindebted is enduring incessant calls and communication from creditors, especially when you’ve fallen behind on making payment. But once you’ve signed up to the debt counselling programme your debt counsellor will act as the go-between for you and your creditors, meaning your creditors will no longer directly contact you.
- Legal protection: For many consumers who fall behind on payments the threat of potentially losing their assets - especially property and vehicles - is stressful. However, once under the debt counselling programme you’ll receive full asset protection. This means that while you stick to your debt management plan, creditors aren’t allowed to repossess your assets.
- Cash relief: Instead of juggling multiple payments the restructured debt management plan allows for these payments to be consolidated into one payment which means increased cash flow. This means that your debt will consume a lesser portion of your salary.
The fee structure is governed by the NCA and includes an application fee, an administration fee, and a restructuring fee. These fees will form part of your reduced monthly instalments. The debt counsellor will also take your financial situation into consideration and ensure that these are worked into your debt instalment in a manageable manner.
Unlike debt consolidation or debt counselling, debt settlement is reserved for consumers who can afford and want to settle their debt by means of a lump-sum payment. Often this means either using a bonus, or a tax return or even having saved some money.
While consumers are well within their rights to settle their debt on their own, a debt counsellor has the skill and knowledge to negotiate on your behalf in order to obtain the best possible reduced interest rate, and therefore the cheapest settlement.
They also ensure that the administration surrounding the process such as the requesting of the settlement letter, the negotiations, the paid-up letter, and the credit bureau updating is handled on your behalf.
While the above are all considered debt rehabilitation programmes there are vast differences in the qualifying criteria for each.
Debt consolidation requires you to take out an additional loan which means that your credit profile needs to be able to accommodate that. In other words, your credit score should not be tarnished in a way that prohibits you from accessing further credit. Typically, consumers who consider debt consolidation are feeling the financial pinch but are not yet completely overindebted.
Debt counselling - while similar - caters to a slightly different market. Here, the applicants are typically overindebted and unable to access further credit. Debt settlement is available to consumers who’re financially able to settle by means of a lump-sum payment.
What will happen when you apply?
When it comes to both debt consolidation and debt counselling a consultant will verify your documentation. Following this, a credit check will be done. You’ll then receive an acceptance letter, which has been legally approved, and you’ll sign the registration letter.
Once this has been handled your debt counsellor will restructure your debt into a management plan and your repayments will be calculated accordingly.
If you’re struggling with your debt and need trusted expert assistance, click here.