Debt Review Versus Debt Consolidation

Debt review (counselling) and debt consolidation services both have the same aim: to help the financial consumer deal with an unmanageable level of debt. We reveal the differences.
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There are quite a few differences between debt review, otherwise known as 'debt counselling', and debt consolidation (combining many different loans into one larger loan). We compare them. See our quick infographic on following the right steps towards debt counselling below. 

Debt consolidation advantages and disadvantages

The Guru describes debt consolidation as streamlining your smaller debts and loans into one larger debt loan. Essentially with one monthly interest rate and one monthly premium. Ask the Guru below if you need advice on the best debt rescue avenue to follow Debt consolidation is able to simplify your debt from having a number of different monthly charges and interest rates with creditors. Under debt consolidation, you have one creditor to manage all of your debts with one monthly premium. debt consolidation

The advantages:

  • Makes it easier to budget and control because you only need to make one payment monthly to your debts. This also has a massive convenience element
  • If can also be psychologically beneficial because instead of dealing with multiple creditors knocking on your door, you make one single payment monthly. Basta with the rest
  • It may improve your credit record. As creditors will be put on hold and your credit profile will start to improve
  • You get to understand what financial freedom feels like. This may have a strong motivational element

The disadvantages:

  • It does not change your spending habits and potentially worsens them. A consolidation loan combines all your debts into one debt which may give you a false sense of security. It could lead to more reckless spending
  • Your debt may increase in term causing you to pay more interest in the long term
  • The consolidated loan can cost you almost as much as a bunch of individual loans per month depending on the interest rate you will be charged.
  • You may pay more interest. For example, some credit cards charge 10 per cent lower interest rates than personal or consolidated loans

Debt review (counselling) advantages and disadvantages

Debt review, on the other hands, takes into consideration all of the consumer's accounts. It then establishes a holistic strategy to get the consumer out of debt, rather than simply one loan. Debt review provides protection to the consumer from the credit providers who harass them or threatened to repossess their assets. More specifically, section 86 of the national credit act 34 of 2005 regulates the debt counselling industry. Therefore, it also allows less flexibility for the consumer, as well as more official protection from creditors.  

The debt review / counselling process

Debt Review

The advantages:

  • It can protect your assets from being repossessed by the credit provider
  • You will feel supported in a cold ocean of debt. This may translate into psychological benefits
  • Your monthly payment may be far more affordable and give you some breathing room

The disadvantages:

  • You cannot apply for any credit while under debt review (which may prove to be an advantage if you are an undisciplined spender)
  • The only way to exit the review is to settle all outstanding debts (except for those related to car and home financing).
When all’s said and done, whether you decide to handle your own debt, get a consolidated loan or enter debt review, will depend largely on your needs.  

Ask the Guru

A financial advisor assists with assessing the total payments under various interest rates, or you could simply ask the Guru. COMMENT below and The Guru will crunch the numbers for you.