Debt counselling vs debt consolidation

2016-06-20 14:43
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Pretoria - Debt Rescue, one of the biggest debt counselling companies in South Africa, conducted a study of the financial situation of consumers that apply for debt counselling and found that consumers still utilise an average of 75% - 80% of their income to pay debt.  

Consolidation loans are an option available to these consumers and at a glance appear to be a solution to the debt trap many face. As account payments will be consolidated into one payment, the amount spend on debt would be less and the money in their pockets would be more. Or would it? 

The reality is that many consumers will not use these funds to settle the existing debt. The temptation to use this money for nice-to-haves is often too high to resist. Many credit providers will not settle the accounts listed by the consumer themselves, but rather opt to pay the funds into the consumer’s account.  This is one of the biggest downfalls of consolidation loans. 

Consumers often fail to settle the existing debt and end up with the added financial stress of the consolidation loan premium, together with the existing debt premiums, throwing them into a financial pit which they cannot get out of. Even if the existing debts are settled, many of these accounts are credit cards, revolving credit facilities, cheque accounts and store cards. These accounts are not closed after settlement and the temptation remains to make use of these readily available funds again.  

“When a consumer applies for debt counselling all accounts are flagged and the consumer no longer use them. The consumer is also flagged as being under debt counselling at the credit bureaus to ensure that credit providers do not grant further credit to them,” says Neil Roets, CEO of Debt Rescue. This is a big adjustment to consumers who are used to utilising credit to survive. 

Debt Rescue do not simply offer the consumer the means to obtain financial freedom, but also financially educate consumers. 

Roets explains that, consolidation loans are alluring due to the prospect of money in your pocket after all the debts are settled. "However, the risks to fail again and use the accounts are high and in the majority of cases consumers are in a worse-off financial position in a short period."

Indeed, a high number of consumers who apply for debt counselling have consolidation loans on their profile, proving that it is simply a short term solution to a long term problem.  

“Debt counselling, if committed to fully by the consumer, will offer the consumer a long term solution with a specific goal of settling the debt in full with no chance of falling further into debt,” says Roets. The proof of the success of debt review has been underlined with a 300% year-on-year increase in the number of consumers declared debt free by means of a clearance certificate.  

These consumers can now enter the credit market again, but many have indicated a lesson learned and will apply the financial education received to ensure that they do not fall into the trap to over-indebtedness again.