Debt Review numbers increase, but is it the right choice?
The notion of debt review was first introduced to South Africa in 2007 by the National Credit Regulator (NCR) to assist consumers whose debt is spiralling out of control. Debt review allows the consumer to restructure and manage their debt more effectively over a longer period of time. Also known as debt counselling, it involves the assistance of a professional who assesses your current debt obligations and works with your creditors to restructure the debt repayment plan.
Since its introduction, the number of South Africans turning to debt review professionals has increased year on year. Statistics from a leading debt management company, Debt Rescue, show that more than 11 million credit-active consumers are over-indebted, with an average debt of R70,000. Further figures suggest the number of people turning to debt management will not reduce in the near future either. According to the Debt Rescue, around 60% of us are struggling to meet monthly repayments, with only 23% of the population having money left over at the end of the month to save.
If you are over-indebted, debt review can help you gain control of your finances. However, are too many consumers automatically turning to debt review firms before fully reviewing the pros and cons? FNB seems to think so after giving a word of caution to consumers at the end of last year. So what are some of the negatives to undergoing debt review?
Firstly, the costs of debt management can be high. You will likely pay a one-off initial fee to set up your account along with a monthly management fee. This will add to the existing money you owe, so factor it into your decision whether a debt review plan will be beneficial. Secondly, whilst under debt review, you will not be able to incur further debt, meaning no access to new or existing lines of credit. You will not be able to use credit cards, overdraft facilities or even store cards – lines of credit that many people rely on each month to manage cash flow. Finally, being on a debt review plan will appear on your credit report. This is a lesser consequence when comparing the negative effect of non-repayments on your credit score, however, it is something to consider. After you complete your debt review plan it may take a while for credit bureaus to update your report.
Below is an example of the fees associated with a debt review plan:
|Once off fees||Restructuring fee||R6,840|
|Credit check fee||R57|
|Monthly Fees||Monthly after-care fee (24 months)||R1,329.53|
|Monthly after-care fee (for the remaining period)||R1,163.34|
It is good to remember that a debt review plan is intended to be your last resort. Here are some alternative ways to try reducing your debt levels if you are starting to feel the financial pinch.
- Do you really need the line of credit? Taking on too much credit is a huge factor for over-indebtedness. Try to use credit for must-have essential items and reduce the use of credit for non-essential purchases. Although luxury items are desirable, they are not worth financial stress long term.
- Talk to your creditors. If you feel your debt getting out of control do not avoid it. Opening up a line of communication is in the interest of both parties and you’ll find that most companies will be willing to discuss alternative repayment options.
- Lifestyle changes. Reducing your monthly expense through cutting back on your lifestyle can be a very effective way of freeing more income to pay your bills. This is often hard to do but well recommended if it prevents you from falling further behind on repayments.
If debt review is your only option, ensure you look around and research your options before entering into a plan. Like all financial products, finding the company and plan that best suits you will help in the long run.