Debt counselling has been around for just over a decade in South Africa. A lot has changed since it was originally introduced in the late-2000’s. There were very few options for consumers struggling with their debt before debt counselling existed. For consumers with financed assets, personal sequestration was available. For consumers with large amounts of short term debt, administration was available. There was a big gap for everyone in-between.
Debt Consolidation Options
Most over-indebted consumers are looking for debt consolidation. Many who are wanting to sort out their debts think they need a debt consolidation loan. Although the concept seems simple, a consolidation loan is still a form of debt and essentially just another loan. This is why credit providers lay down strict criteria before granting this type of loan.
What Is Debt Counselling?
Debt counselling was introduced in 2007 as a solution that would benefit both credit provider and consumer. The consumer benefits by paying a lower, affordable monthly instalment and saves money due to interest rate reductions. The credit providers benefit by receiving a solid payment plan and ensuring that they get their capital back. The debt counsellor is essentially the middle man and hold the relationship between the 2 parties. The debt counsellor facilitates the negotiations process and ensures fairness between the consumer and his debtors.
It took a while for the debt counselling process to take shape. Debt counsellors themselves had to start putting processes and systems in place, as the regulator guidelines and the ACT is vague. It is safe to say that the early debt counsellors paved the way and molded the process into what it is today.
Debt Counsellors Everywhere
Loads of legal and financial professionals signed up to become debt counsellors in the early stages. Due to the complicated nature of the process, only a few have survived. To successfully execute the debt counselling process and ensure clients make it all the way to debt freedom a large, skilled team is required. A lack of scalability and an in-depth knowledge of the intricacies of the process seem to have caused many debt counsellors to shut down. There were also many debt counsellors who were in the business for upfront fees and not the long run.
Recent Enhancements To The Process
In past few years there have been great improvements made which have made debt counselling more robust.
a. The use of Payment Distribution Agencies
A Payment Distribution Agency (PDA) facilitates the payment process for debt counsellors. Debt counsellors put in all the inputs on the PDA’s system, which we call the payment plan. When the client pay into the PDA it then distributes the funds to each credit provider accordingly. This ensures the client’s money is safe and secure and allows greater transparency.
b. The effective reduction of interest rates
Not all debt counsellors believe in reducing interest rates. Consumers should ask if the debt counsellor uses the DCRS system. This system can drop unsecured debt interest rates to as low as 0%, which saves the consumer huge amounts of money.
c. Legal protection and clearance certificates
Debt counselling is a formal, legal process. Debt counsellors have an allocated timeline to get the finalized negotiations ratified. By getting the new arrangements with credit providers rubber stamped, they effectively replace the old agreements.
Once all of the consumers debt has been repaid (excluding home loan), the consumer will be issued with a clearance certificate. This indicates that all accounts have been paid off and the credit report is now clear. The client would once again be able to take out debt if they wish to do so.
Debt Counselling Fees
Many people criticize the debt counselling fees, but these seems to compensate debt counsellors for the amount of work they do to get consumers out of debt. For most of them, debt counselling is the only option they have. This is due to their over-indebted financial situation, often referred to as being blacklisted.
Debt counselling, when correctly executed, is a fantastic process. It instantly relieves the consumer of stress and puts them into a more manageable financial position. The consolidation of debt instalments makes budgeting much easier and allows the consumer to manage debit orders effectively. The largest relief comes from making the debt repayments more affordable. By stretching the payment term and reducing interest rates, debt counsellors are able to reduce monthly debt instalments.
Today there is still a large demand for the debt counselling process and there are plenty of debt counselling companies doing a great job. Consumers often struggle to choose the correct debt counsellor, as there are many companies out there.
How Do You Know If You Need Debt Counselling?
If you are struggling to manage your debt and run out of money before payday each month, perhaps you need some assistance. It is better to ask for help sooner rather than later and get on the right track as soon as possible. Debt counsellors will give you a free assessment which includes pulling your credit report and running through a budget. The debt counsellor will then give you some advice and offer you a suitable solution if you qualify. The aim of the advice is to help you manage your debts and clean up your credit report.