Debt relief aims to reduce or refinance your debt so that it’s easier for you to manage your monthly expenses. Making it easier for you to get rid of all your debt and finally become debt-free.
If you’re drowning in debt, it’s important that you find the most effective debt relief option for your situation.
What exactly is debt relief?
Debt relief is the reorganisation of debt that aims to reduce the financial burden of over-indebted consumers. There are various forms of debt relief. It may include reducing the outstanding principal amount, lowering interest rates or extending payment terms.
What are the different types of debt relief?
You need to find the perfect debt relief option for you, taking into consideration your financial situation.
Here are the four main types of debt relief options available for South African consumers:
1. Debt counselling
In 2007, The National Credit Act (NCA) introduced debt counselling (also known as debt review) to prevent over-indebted South Africans from being blacklisted and having to deal with the consequences thereof. This debt relief measure is ideal for South Africans who are battling to keep up with debt payments and make ends meet.
Debt counselling, unlike other debt relief solutions, offers a long term debt solution.
If you qualify for debt counselling, a debt counsellor, registered with the National Credit Regulator (NCR), can help you with the legal process.
Your debt counsellor will:
- Negotiate with your credit providers to extend credit agreements and possibly reduce interest rates on your credit agreements.
- Draw up a tailored budgeting plan that consolidates your debt into one single and affordable monthly debt payment.
- Ensure that you still have enough money for household expenses.
As with the other types of debt relief options, debt review is not suitable for everyone.
You are an ideal candidate for debt review if:
- You are a South African citizen
- You are employed and earn an income
- You are unable to meet financial obligations
- Your debt counsellor confirmed that you are over-indebted
- You are committed to becoming debt-free
2. Debt consolidation loans
A debt consolidation loan includes all your smaller debt accounts into one large loan amount. So, instead of paying multiple smaller debt accounts, you’ll only be paying one large debt account.
Consolidation loans are usually offered at lower interest rates and extended repayment terms.
While this may seem like a great way to reduce stress and free up monthly income, there are downsides to consolidation loans, which may include:
- Although you pay a lower monthly debt installment, you end up paying more due to extended payment terms.
- Companies that offer consolidation loans may increase your interest rates, leaving you with less cash every month.
- Because your credit cards are cleared, you may be tempted to make more debt.
3. Debt settlement
Debt settlement involves paying a lump sum that is less than what you owe to resolve your debt. A debt settlement company will negotiate with credit providers on your behalf to help settle your debt as quickly as possible.
While debt settlement seems like a very enticing way to get out of debt, it may come with big consequences.
Debt settlement companies advise you to stop paying your debt and make payments into an account with the company. As soon as there’s enough money in that account, the company will use the cash to negotiate with your credit providers for a lower current principal and interest rate.
This is a risky process because you stop paying your debt for a period of time. It may end up costing you more and this process will have an impact on your credit score.
It is, therefore, not a recommended debt relief option for indebted consumers.
If you’re unable to meet your outstanding debt repayments could file for bankruptcy. This legal process enables you to repay all your debt by selling your assets to creditors.
Which debt relief option is right for you?
This depends on your financial situation. We recommend contacting a Debt Rescue to see if you qualify for debt counselling. If you qualify, Debt Rescue will help you get out of debt and regain control of your finances.