Debt counselling versus debt consolidation — let’s explain

If you’re struggling with managing your debt, you may consider debt counselling or a debt consolidation loan as possible solutions 

It is, however, important to understand the difference between these two debt solutions. Although both aim to simplify your debt, they are two differently designed processes.

The five need-to-know differences between debt counselling vs debt consolidation are:

1. The process of each 

Debt counselling allows you to consolidate your debt without having to take out an additional loan. The debt counsellor will negotiate lower interest rates and fees with credit providers on your behalf, and arrange a restructured, combined monthly repayment amount.

Debt consolidation requires you to combine all your debts by taking out a bigger loan to cover your smaller loans. The idea is to make it easier for you to manage your debt by making one repayment towards the consolidation loan each month, rather than worrying about paying various credit providers each month.

2. Taking out credit

Debt counselling prevents you from taking out any further credit while you are under the debt counselling process. This is for the consumers own good as the debt counsellor will restructure your repayment plan so that you have enough money to afford your living expenses each month. Taking out more credit will only hinder your financial situation further.

Debt consolidation allows you to apply for further credit. While this may seem ideal, many people are not disciplined enough to steer clear of wracking up more debt and managing it properly. This could result in a consumer becoming over indebted and needing to go under debt counselling.

3. Protection from creditors

Debt counselling gives you full legal protection from creditors, as outlined in section 86 of the National Credit Act. This means that all communication will go through your designated debt counsellor.

A debt consolidation loan on the other hand means that creditors are still free to contact you.

4. Your assets

The debt counselling process is designed to protect you from the repossession of your assets.

A debt consolidation loan will not protect your assets from repossession as part of the agreement.

5. Qualifying criteria

The debt counselling solution is designed for those who are gravely in arrears with their debt repayments and struggling to manage it.

For debt consolidation, the minimum criteria is a clear credit record and no existing arrears on debt repayments. Further, for debt consolidation to work, consumers must be sure that they are able to afford the monthly instalment every month, which is typically not possible for debt counselling candidates.

If you’re in over your head when it comes to managing your debt, you may need to consider contacting a trusted debt management company.

DebtBusters can help you if you’re struggling to pay off your debt. Speak to a consultant at info@debtbusters.co.za. Alternatively, you can call us on 086 999 0606.

At DebtBusters we will find the best debt solution for you and walk you through the process — one step at a time.