Debt consolidation and debt review, while both a means to assist people in debt have two different functions. Kirsten Reynolds, marketing executive at online lender GetBucks, noted that the debt review process was introduced by the National Credit Regulator (NCR) “in an attempt to assist the surge of over-indebted consumers who cannot meet their debt obligations.”
Under debt review, you have a dedicated debt counsellor who negotiates repayments with your creditors on your behalf to ensure that you pay your debts, while also having enough money to live on. While under review you are not able to take on any additional forms of credit, including loans and store cards. It is important to note that debt is not written-off under debt review, but rather the process assists over-indebted people to restructure their debt in order to pay it off.
Debt consolidation by comparison is a loan that people take out in order to pay-off all their debt, leaving them with only one loan to repay.
DebtBusters explained: “Debt consolidation is a good debt management option to consider when you owe a large amount of money to creditors and if you are not over-indebted. Debt consolidation involves using new debt to pay off existing debt that’s owed to creditors. When done correctly, debt consolidation can help you get out of debt faster by paying less interest on debts and correctly managing your finances.”
Debt consolidation
Theunis Kruger, head of Unsecured Lending at Standard Bank, said: “It is a sad fact that millions of South Africans spend a large portion of their monthly income to service debt in the form of instalment sales and account-based spending. They have to settle these payments before even thinking about putting food on the table. It is a no-win situation that becomes unbearable when an unexpected expense comes along and destroys what little spending money is left over after monthly commitments are met.
“In many instances the solution is debt consolidation. But before the step is taken, the impact of consolidating different debts should be considered.”
However, Kruger highlighted that there are two types of debt, short term debt such as credit cards and store cards, and long term debt, such as a home loan. When these two types of debts are consolidated into one ‘payment pot’, the cost of debt consolidation can be high.
Kruger noted: “The main objective becomes seeing monthly commitments being consolidated into a single manageable payment, but the implications of long repayment periods on personal cash flow is not fully considered.”
One way to consolidate your debt, Kruger explained, is to ask your bank to consolidate all your debt into your home loan, meaning that all your short-term loans will be paid-off, while you still have the remaining repayments on your home loan.
However, Kruger emphasised that there are several things that you need to be aware of before opting for debt consolidation. He provided the following two examples to illustrate:
1. Consider a personal loan of R 20 000 payable over 48 months at 14.25% interest per annum (p.a.). The following would apply:
Monthly repayment: R 549.04
Total payment over 48 months: R 26 353.97
With the payment extended to 84 months at a reduced interest rate of 11.25% p.a. The following would apply:
Monthly repayment: R 345.08
Total payment over 84 months: R 28 987.00
Additional payment over the longer period: R 2 633.03
2. Consider a larger ticket item, say a car on which there is R 150 000 still owing and a term of 48 months outstanding. As this is a major expense and it is being combined with other debt, a repayment period of 10 years is put in place, with the additional payment going on to a home loan. If the same interest rates are applied the following would occur:
Monthly payment over 48 months (14.25%): R 4 117.81
Total payment over 48 months: R 197 654.76
With the payment extended over 120 months (11.25%) the following would apply:
Monthly repayment: R 2 087.53
Total payment over 120 months: R 250 504.10
Additional payment over the longer period: R 52 849.35
Kruger suggested that before choosing debt consolidation people need to consider the following:
- Understanding the repayment implications of your consolidated long-term loan.
- Compare interest rates across all debts that you owe.
- Only use long-term debt solutions when it is absolutely necessary.
- Consider paying extra into the account every month as soon as possible to reduce the loan period and save you money.
Lastly, Kruger stressed: “Remember to not take out any further debt until this loan is paid back, otherwise you may find yourself in the very same situation.”
Debt review
The purpose of Debt Review is to lower your monthly debt instalments, thereby making it more affordable for you to pay every month. Once under the process:
- Your debt repayments will be reduced to an amount that you can comfortably afford.
- You will make one combined monthly debt repayment that is affordable to you.
- Your Debt Counsellor will negotiate with your Credit Providers to reduce interest rates and fees on your accounts.
- Your Debt Counsellor will apply to get a court/consent order on your behalf, which will provide you with legal protection from your Credit Providers.
- When your debt is paid off, your Debt Counsellor will update the credit bureau and your credit record will be restored.
DebtBusters notes: “Debt Review is a long-term solution for someone who is over-indebted. It is not a quick-fix to your debt problems. It requires commitment to the process. The entire process could take as long as five years, depending on how much debt you have, how much you can afford to pay each month and whether you have assets or not. However, clients that are committed to the process and pay any additional income such as bonuses and tax rebates into their debt, have been able to get themselves out of debt review within three years.”
Debt Review is a formal process, which is governed by the National Credit Act. Your monthly debt repayment amount is specific to your situation and how much you owe in total. Debt Counsellors are permitted by the NCR to charge certain fees.
Some of the costs included in the debt review process include:
- An application fee of R 57 (incl. VAT) is payable with your application,
- A restructuring fee to the maximum of R 6 840 (incl. VAT) is payable in your first month,
- A credit check fee of R 57 (incl. VAT) is payable with your restructuring fee,
- A rejection fee of R 342 (incl. VAT) should the debt counsellor not consider your application,
- A monthly after-care fee equal to five percent of the monthly instalment on your payment plan, to the maximum of R 456 (incl. VAT) for the first 24 months.
- Thereafter, a monthly after-care fee for the remaining period equal to three percent of your monthly instalment.
- A sundry fee/legal fee is due in your second month of rehabilitation, this is a once off fee and the amount varies depending on the complexity of your legal process.
- A Payment Distribution Agency (PDA) fee, which is three percent of your monthly rehab payment (to the maximum of R 570 incl. VAT) each month.
On top of these fees, Reynolds pointed out that there is also a withdrawal fee of up to 75% of the restructuring fee if you decide to end the debt review process.
It is important to note that with the reduced monthly instalments payable under debt review, the repayment period will be extended, meaning that people could pay more interest on these debts as they are paying them back over a longer period, noted Reynolds.
DebtBusters argued: “A good debt counsellor will ensure that interest rates are reduced as much as possible, sometimes to as low as zero percent, so as to minimise the amount of additional interest an individual would have to pay as a result of extended payment periods”.
What many people also don’t grasp is that entering into the debt review process restricts you from obtaining further credit, which means that you cannot take out a loan, purchase a car on finance, open a store card or use any other form of credit.
DebtBusters explained: “When you sign up for Debt Review, your Debt Counsellor will ensure that all Credit Bureaus and Credit Providers are notified that you are now under Debt Review. The Credit Bureaus will then proceed by flagging your profile on their system as ‘under debt review’.
This is done in order to ensure that you are prevented from taking on more credit. The Debt Review process is implemented to rehabilitate your financial situation and taking on additional credit will be detrimental to you gaining financial well-being in the future.
However, once you have paid off your debt, your Debt Counsellor will send a Clearance Certificate to your Credit Providers, as well as notify the National Credit Regulator (NCR) and the Credit Bureau via the NCR Debt Help system. Consequently, Credit Bureaus will be prompted to remove the ‘under Debt Counselling’ flag from your profile, allowing you access to credit once again.
Therefore, once you have paid off all your debt under Debt Review; you are free to borrow again and will be allowed to purchase a house, car, etc. as long as you meet the requirements set out by the relevant Bank or Credit Provider”.
For more information on debt consolidation, click here.
For more information on your debt obligations, click here.
For more information on the debt review process, click here.