Managing personal finances can often be overwhelming, especially when faced with mounting debts and financial obligations. In such situations, seeking the right solution to alleviate the burden and regain control of your finances is a logical step, and the commonly considered options are Debt Consolidation and Debt Review.
Denise Hartley, Chief Operations Officer at FNB Collections, says, “While Debt Consolidation and Debt Review are terms that are loosely used interchangeably, they mean completely different things. So, it is crucial to understand the difference to help you make informed decisions about the most suitable solutions for your financial situation.”
Hartley explains the difference between Debt Consolidation and Debt Review:
“Debt Consolidation involves combining multiple debts into a single loan, and it is a service that is offered by registered financial service providers or lenders such as banks. The consumer goes through the standard affordability and credit assessment processes, and those who are successful can consolidate all or some of their debt into a single loan with one monthly installment over an agreed-upon term. In some cases, Debt Consolidation can reduce the overall interest rate and monthly repayments,” she says.
Consolidating your credit commitments could help you avoid juggling multiple repayments that have separate interest rates and initiation fees where required, usually provided by different credit providers.
In addition, the process of Debt Consolidation can simplify budgeting and improve cash flow management, especially if the outcome reduces your monthly installment or the interest rates charged on the consolidation loan. However, it is important to note that Debt Consolidation does not eliminate or reduce the actual debt amount you owe.
Debt Review, on the other hand, is described by Hartley as a statutory or legal process that provides debt relief to over-indebted consumers through a Debt Review process. Only debt counsellors who are registered with the National Credit Regulator ought to provide these services.
While Debt Review provides some protection for consumers, there are growing concerns that consumers who can still manage their finances are lured by promises of much lower installments without being informed of the legal and financial ramifications of being in Debt Review.
Before following any course of action, it is important to understand your debt position, scrutinise and question your monthly budget and expenditure – know what is necessary and what is not, and examine all options available to you.
For certain consumers, debt review is the best option and will assist in rehabilitation. Whether you decide to go into debt review, apply for a debt consolidation or negotiate directly with your credit providers, i.e., your bank, to assist in exploring alternative options, an informed decision is always best.
The outcomes of any of these processes will be heavily influenced by your financial situation, which is why consumers are cautioned against waiting until their financial situation has severely deteriorated before considering their options.
“In conclusion, understanding the difference between Debt Consolidation and Debt Review is critical for individuals seeking to regain financial control. This understanding could help you make informed decisions and choose the best path to stabilising or improving your financial situation,” says Hartley.