Debt counselling, also known as Debt review, was introduced in the National Credit Act in 2007. Debt counselling assists over-indebted consumers get out of debt. A debt counsellor helps over-indebted consumers by negotiating with their credit providers and coming up with a new affordable payment plan. Debt counsellors are governed by the National Credit Regulator (NCR).
Debt Counselling Is For Over-Indebted Consumers
When your monthly debt repayments and living costs are higher than your take-home income, you are over-indebted. Essentially, over-indebted cannot afford their lifestyles and this often resorts to missing debt repayments or taking out more debt. Missing debt repayments is not encouraged and has bad effects on your credit score.
Many over-indebted consumers do not have many options available to them. Most of them only seek help once the banks stop lending to them or they become ‘blacklisted’. If you ignore your debt problems until it is too late, very few remedies will help you out of the debt rut. Before the introduction of the new National Credit Act, consumers had limited options. They would either become sequestrated or have to go under administration. Both of these options had dire consequences and had long lasting effects. Under sequestration, all assets are surrendered, which are sold to pay outstanding debt. Administration took up to 10 years and often the capital portion increased due to low repayments, interest and punitive fees.
Why Was Debt Counselling Introduced?
Debt counselling gives consumers a fair chance to become debt free. A debt counsellor will determine if the consumer is over-indebted. The debt counsellor negotiates with all of the consumers credit providers to reduce instalments and interest rates. Credit agreements are stretched over a longer period which makes the monthly repayments more affordable. The consumer will still have all of their debts; however, they will now only have one, simple monthly repayment which will be affordable to them and in line with their budget.
In the past, there were plenty of debt counsellors competing for new clients to provide this new service to. The debt counselling process was not well defined. Many registered debt counsellors were looking to make a quick buck. Most of the smaller debt counsellors have been squeezed out and only a few debt counsellors remain. It is important to choose a debt counsellor that uses the correct systems and processes. Debt counselling has evolved into a wonderful debt management solution and has assisted hundreds of thousands of South Africans.
Pros And Cons Of Debt Counselling
Benefits of Debt Counselling:
- One lower, affordable monthly debt repayments
- Saves the client money due to interest rate and fee reduction
- Prevents creditors from harassing the client
- Prevents creditors from initiating legal action against the client
- Save the client’s home and vehicle from repossession
- Client can become debt free in 36-60 months
- Simple payment plan
- Clean up the client’s credit report
- Clearance certificate issued once process complete
Under debt counselling, the consumer is unable to take out more debt. This is often listed as a disadvantage. Over-indebted consumers should not be taking out more debt and this restriction teaches them to live without relying on debt.
The longer period of time is also a deterrent. The process can take between 36-60 months. Credit agreements are stretched over a longer term so that monthly payments can drop to an affordable amount.
Is Debt Counselling Expensive?
Debt counselling is often criticized for having high costs. The debt counselling process is very complex and involves many steps. Relative to the large savings that some debt counsellors can achieve of their clients through interest rate and fee reduction, the cost of the process is insignificant. The client stops paying all debts from the first month, which allows for the collection of the fees. The client’s new payment plan includes all fees which means that they are never put out of pocket. For example, ff the client’s debt repayments have been reduced from R10,000 per month down to R3,500 per month, that is what they pay from the first month under the process.
Debt counselling is not the best solution for everyone that has debt. If you are over-indebted, it is worth considering debt counselling, but it may not be your only option. If you are unable to afford a consolidation loan, debt counselling might be the only option for you. There are quite a few misconceptions about debt counselling, it is best to speak to a professional and get a proper assessment done.