Debt consolidation comes in a few shapes and sizes. Banks, debt counsellors and credit providers advertise debt consolidation as a solution to people with too much debt. Consumers that have many loans look to consolidate their debt to make the instalments less and easier to manage. Let’s explore the different types of consolidation products in the South African market.

Debt Consolidation Loans

A debt consolidation loan is a large loan that is used to pay off most or all other debts. The loan usually has a longer term, which subsequently reduces the instalment amount. Consolidation loans are granted by most big banks and other larger credit providers such as Old Mutual and Direct Axis. There is a common misconception that a consolidation loan is a debt management solution. It is actually just another loan and often, the consumers get to determine what to do with it. This is one of the downfalls.

The credit providers will ask you for settlement letters for all your smaller debts, but they do not facilitate the settling of those debts. It is for this reason that it is extremely difficult to get one of these loans if you already have a lot of debt. The credit providers will do an affordability assessment and use your current income, expenses and debts in order to determine if you qualify. In most instances, consumers that require these loans already have a large amount of debt and not much affordability, hence they don’t qualify.

A consolidation loan, if used properly, is a great way to manage your debt and keep track of your finances. Instead of paying 8 or 9 different loans and credit cards, you only pay one amount. Usually this one amount is much more affordable and will be over a longer period of 36-60 months. They do, however, carry large interest rates due to the riskiness of such a loan.

Qualification criteria:

• You need to have affordability
• May not be over-indebted
• Cannot be in too many months arrears on accounts
• Your credit score has to be relatively high

Debt Counselling

Debt counselling works similarly to a consolidation loan in that the consumer will be left with only one payment to make each month that is more affordable. The term will be stretched over a longer period to squeeze the monthly payment down. One main difference is that with debt counselling, the debts are not settled with only one loan remaining. The debt counsellor will negotiate new, better terms on all credit agreements. Usually the terms are lengthened and the interest rates are reduced in line with your affordability.

The monthly instalments are consolidated, instead of consolidating the outstanding balances. The consumer pays one amount per month which will be distributed to the creditors based on the new negotiated instalments. This makes it much easier for the consumer to manage their debt and budget properly. Debt counselling is a formal debt management solution which was introduced in the National Credit Act in 2007 and is regulated by the National Credit Regulator (NCR).

Whilst under debt counselling, the consumer will not be able to take out any new debt. It is a rehabilitation process and therefore tries to teach the consumer to live within their means and not rely on credit. This is now possible as monthly debt repayments have been reduced and are now in line with their budget and affordability.

Qualification criteria:

• You must be over-indebted (as determined by the debt counsellor)
• Any credit score
• Can be in arrears/legal action

How Do I Go About Consolidating My Debt?

Speak to one of the big banks or larger credit providers to see if you qualify for a consolidation loan. If not, approach a debt counsellor for help. A debt counsellor will do a financial assessment and see how they can assist you with your debt. Perhaps you need some budgeting advice and other money-saving tips, however, debt counselling may be the best option for you if you have lots of debt and rely on debt every month to get by. If you are still confused, you’ll be able to find lots of information on both debt consolidation processes.