Debt consolidation and debt review: What you need to know
While debt consolidation and debt review are used interchangeably but mean different things.
Managing personal finances can often be overwhelming, especially when faced with mounting debts and financial obligations.
In such situations, seeking the right solution to ease the burden and regain control of your finances is a logical step. The commonly considered options are debt consolidation and debt review.
Denise Hartley, COO at FNB Collections, said, “While debt consolidation and debt review are used interchangeably but mean different things. It is crucial to understand the difference to make informed decisions about the most suitable solutions for your financial situation.”
Hartley explains the difference:
Debt consolidation:
Debt consolidation involves combining multiple debts into a single loan. It is a service offered by registered financial service providers or lenders, such as banks.
The consumer goes through the standard affordability and credit assessment processes. If successful, he merges all or some of the debt into a single loan with one monthly instalment over an agreed-upon term.
“Sometimes, debt consolidation can reduce the overall interest rate and monthly repayments,” she said.
Consolidating your credit commitments could help you avoid juggling multiple repayments with separate interest rates and initiation fees, usually provided by different credit providers.
In addition, debt consolidation can simplify budgeting and improve cash flow management, especially if the outcome reduces your monthly instalment or the interest rates charged on the consolidation loan.
Consumers must note debt consolidation does not eliminate or reduce the actual debt amount they owe.
Debt review:
Hartley described debt review as a statutory or legal process that provides debt relief to over-indebted consumers through a debt review process. Only debt counsellors registered with the National Credit Regulator may provide these services.
“While debt review provides some protection for consumers, there are concerns that consumers who can still manage their finances, are lured by promises of lower instalments without being informed of the legal and financial ramifications,” said Hartley.
Before doing anything, understand your debt position, scrutinise and question your monthly budget and expenditure and know what is necessary and what is not. Examine all options available to you.
For some consumers, debt review is the best option and will assist in rehabilitation. An informed decision is always best, whether you go into debt review, apply for debt consolidation or negotiate directly with your credit providers to help explore alternative options.
“The outcomes of these processes will be influenced by your financial situation, which is why we caution consumers against waiting until their financial situation has severely deteriorated before considering their options.
“This understanding of debt consolidation and debt review could help you make informed decisions and choose the best path to stabilising or improving your financial situation,” said Hartley.
