You may have heard the term debt management. Although it sounds like quite a mouthful, quite simply, debt management is a financial solution that can help manage your debt and ease financial strain.
When it comes to debt management, there are two possible solutions to consider: debt counselling or a debt management or consolidation loan. But what is the difference between the two?
A debt consolidation loan helps you manage all your debts. How it works is fairly simple: you combine all your debt by taking out one bigger loan to cover all the smaller loans you might have. This could include that personal loan you took out so you could buy a new washing machine, the money you haven't been able to pay back into your credit card because you took a salary cut, or the three different store accounts that you've fallen behind on paying.
Instead of trying to keep on top of all the payments and interest that's slowly accumulating, a consolidation loan helps you manage your debt through one loan repayment each month.
Debt counselling, on the other hand, is a legal process that helps you take care of all your debt without having to take out another loan. It's also known as debt review, and the process is quite straightforward. You appoint a debt counsellor who looks at how indebted you are. Once they've done that, they negotiate lower interest rates and fees with your lenders and credit providers on your behalf.
When they reach an agreement, you'll go on to make one single affordable monthly payment. This is paid to an Independent Distribution Agency, who distributes the money to all the creditors included in your debt counselling process for the duration of the plan.
Read more: Is Debt Counselling For Me?
When you sign up for debt counselling, you won't be able to take out any more credit while you are in the process. But don't see this as a problem. Instead, look at it as part of good debt-management practice as your creditors will have agreed to restructure your current credit agreements and repayment plans. This, in turn, gives you more cash flow so you can afford your monthly living expenses.
If you qualify for a consolidation loan, you'll be able to apply for further credit down the line. But if you don't use the bigger loan to settle your smaller debts, and if the bigger consolidation loan has a very high interest rate (which it often does), then you could land up in even more debt, struggling to make ends meet.
The National Credit Act (section 86) gives you full protection from creditors when you sign up for debt counselling, and your designated debt counsellor deals with them directly. The process also protects your assets, which means your vehicle and/or property can't be repossessed.
With a consolidation loan, you deal with your creditor(s) directly, which means they are free to contact you. Your assets are not protected, and if you fall behind on payments, they can be repossessed to help cover your debts.
This article is for informational purposes only and should not be construed as financial, legal or medical advice.