Unsure whether it’s debt counselling or debt consolidation you need? We unpack the differences between the two, explore the benefits of each, and weigh up which option might be best for you.
How debt counselling works
Debt counselling is a solution available to anyone who is overindebted.
If you have more debt than you can afford to repay, whether credit cards and store accounts, finance agreements, or loans, then by definition you are overindebted. Missing your payments can lead to increased interest, damage to your credit record, and financial stress.
Debt counselling, introduced through the National Credit Act (NCA), can help you get back on track financially by working with a qualified debt expert who will evaluate your finances, negotiate with your creditors, and create a restructured payment plan for you.
Essentially, this new payment plan can simplify your life by combining multiple debts into one lower-interest monthly instalment.
While debt counselling has several advantages, it’s important to know that you can’t take on any new credit while under debt counselling. Any debt included under the agreement will need to be repaid in full, and you’ll need a clearance certificate before you can apply for new credit.
Key benefits of debt counselling
- Legal protection: Your creditors can’t take legal action against you or repossess any assets included in your debt counselling agreement.
- Reduced repayments: Revised interest rates, which are negotiated with your credit provider on your behalf, can lead to more affordable repayments.
- A clear route to settling debt: Debt counselling provides a structured, legal way to settle your debt. By following the plan, you can pay off your debt and repair your credit record over time.
How debt consolidation works
Debt consolidation is another solution if you’re debt stressed. It involves combining multiple debts into a single debt, by taking out a new loan.
Unlike debt counselling, consolidating your debt in this way is not a legal process.
It's important to note that the interest rate on the new loan could be higher than the rates on some of your original debts. The repayment period may also be longer, costing you more in interest over time.
In addition, you’ll need a good credit score and a regular income to apply for a debt consolidation loan.
These factors may make this option inconvenient, or inaccessible to you. If you can't qualify for another loan, consolidating your debt via debt counselling would be a better option for you.
Key benefits of a debt consolidation loan
- Simplicity: One monthly payment replaces multiple instalments.
- Potential cost savings: If you can get a lower interest rate than the rates on your current debts, you could reduce your overall costs. For example, the new interest rate may be lower than the rate applied to a credit card or short-term loan.
- No change to your credit record: There is no formal notification on your credit report for consolidating debt through a loan.
- You can apply for new credit: Nothing prevents you from taking out further credit if you wish to do so.
Debt counselling and debt consolidation: Key differences
Legal status
Need debt counselling or consolidation?
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Find out more- Debt counselling: Court-approved under the NCA
- Debt consolidation: A private agreement with a lender
Eligibility
- Debt counselling: Designed for people who are overindebted
- Debt consolidation: Best if you still have a good credit score and can qualify for a new loan
Monthly payments
- Debt counselling: Reduced repayments are negotiated with your creditors, and consolidated into a single monthly instalment
- Debt consolidation: A single monthly repayment towards a new loan
Credit bureau notification
- Debt counselling: Noted on your profile during the legal process
- Debt consolidation: Your record only reflects the new loan, not a legal process
Legal protection
- Debt counselling: Yes
- Debt consolidation: No
Debt counselling or debt consolidation – which one should you choose?
If you’re overindebted, debt counselling offers legal safeguards and a clear structure for settling your accounts.
If you simply want the convenience of fewer monthly repayments and can secure a favourable loan, debt consolidation might be more convenient.
Seeking professional assistance
Debt experts at DebtBusters can walk you through potential solutions to your personal financial challenges.
They will analyse your unique situation and recommend the best strategy for achieving a debt-free future.
Contact us:
- Email: info@debtbusters.co.za
- Phone: 086 999 0606
Take charge of your finances today. DebtBusters can support you every step of the way, one repayment at a time.
FAQs
1. Does debt counselling affect my credit score?
Yes. Your credit report will note that you’re under debt counselling, meaning that you may not apply for new credit. Once the process has been completed and you’ve settled your debts, your record will be updated. Your credit score will steadily improve as you pay your instalments.
2. Can I be under debt counselling and take out a debt consolidation loan simultaneously?
No. Debt counselling is a legal process that helps you restructure your debt, whereas a debt consolidation loan involves taking out a new loan to write off debt. The processes do not overlap.
3. Do I need a good credit score to consolidate my debt?
If you opt to consolidate your debt through a loan, you’ll need a good credit score, because lenders will check your creditworthiness before approving the loan. If you opt for debt counselling, you don't need a good credit score.
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