Has Debt Counseling Failed?

According to consumer credit market report (CCMR) quarterly bulletin published by NCR, South Africa’s consumer credit gross debtor book stands at R2,040 billion in March 2021. The figure could have been higher if the 62.47 % of new credit applications had not been rejected due to affordability-related issues. The high level of rejections of new loan applications shows that there is a strong appetite for consumer credit despite worrying debt levels across South Africa. One of the solutions postulated in the National Credit Act that can help to effectively address and reduce Gross National Consumer Debt is debt counseling.

Has Debt Counseling Failed?

Over the years, when done correctly with the help of a professional debt counsellor: Debt counseling can help lower your monthly payments, legally protect your vehicle and assets from repossession, protect you from harassment from debt collectors, reduce interest rates, deprive you of the ability to borrow so you can pay off your current debt before applying for a new loan.

However, debt counseling has its own myths in the eyes of the average consumer who has often heard many shocking debt counseling horror stories. The purpose of this article is to highlight the most common reasons why debt counseling seems to have failed among some ordinary consumers.

Myths about why debt counseling seems to have failed

Misleading commercial practices – Some dishonest debt counseling companies deceive consumers by posting misleading information on social media platforms such as Facebook and Twitter. Consumers are tricked into signing up for debt counseling under the false pretense that they will get a consolidation loan. These advertisements misrepresent the main purposes of the National Credit Act (NCA) regarding debt counseling provisions as a debt relief measure. This has brought debt counseling into disrepute by giving it a bad name. False advertisements further undermine the efforts of real, professional debt counselors who genuinely put the interests of over-indebted consumers first.

Debt takes longer to pay off – Financially, there is a relationship between the debt repayment period and interest rates. The shorter the repayment term of a loan, the higher the interest rate applied and vice versa. Take for example the interest charges on a personal loan which can reach 60% per year but whose repayment period varies from one month to three months at most. In order to reduce your monthly installment under debt counseling, the debt repayment term is extended to cover a longer period. It seems that it now takes longer to pay off your debt because you are paying smaller amounts each month. However, as a consumer, you would have saved a lot on interest payments through negotiations with creditors, which means you will be paying off less debt in the long run. Contrary to popular perception, if your financial situation improves, you are allowed to make additional payments for the repayment of your debts while you are under debt counseling and significantly reduce your repayment period.

You will no longer be able to apply for a loan – It is true that consumers will not be able to acquire more credit while they are receiving debt counseling, but only for the duration of the debt counseling process. This is because income and living expenses need to be carefully managed to ensure you stay on track. It seems like a downside, but access to credit is what got you into this situation in the first place. The primary goal is to teach consumers to live within their means, a lesson that will pay off in the long run. As soon as your name is cleared from debt counseling, it is very easy to access credit if you can afford it. All that is required after debt counseling is that you rebuild your credit score, as you will be starting on a fresh list.

Debt counseling negatively affects your credit report – Although debt advice does have an impact on your credit score, rest assured it’s only temporary. You will be listed on all credit bureaus as being on debt counseling, which will prevent you from acquiring more credit until all your debts are cleared and a clearance certificate be issued by your debt adviser. The good thing is that debt counseling will allow you to pay off your debts in about five years, after which you will start rebuilding your credit score again. The flag is removed once the process is complete and there will be no record that you were under debt counseling before.

Debt counseling does not reduce the debt you owe – Debt counseling does not erase your debt, it only has the effect of restructuring your debts by facilitating repayment, not reducing them. Thus, over-indebted consumers are still expected to repay their debt. Debt counseling is not a form of punishment for credit grantors. Remember that a creditor gave you money in good faith, so you must pay it back in good faith.

Debt advice remains the most powerful tool for those who want to escape the clutches of a vicious debt trap. The most important thing is to find a professional debt adviser, who has an in-depth knowledge of finance. If done correctly, debt counseling provides affordable legal protection, peace of mind, and overall financial well-being.

Sylvester L. Goldfarb