Why you should consider debt counselling

Rising interest rates and an uptick in inflation are squeezing South African consumers between the proverbial rock and hard place, as the cost of servicing debts goes up while the purchasing power of their money declines.

Benay Sager, chairperson of the National Debt Counsellors’ Association, says consumers’ disposable income has decreased by a quarter since 2016 when the cumulative effect of inflation over the six years is considered.

Data from National Debt Counsellors’ Association members shows that consumers are borrowing to make up the shortfall.

“Increasing inflation will exacerbate the pressures consumers are under, as the cost of debt is rising and take-home pay does not stretch as much as it used to. For consumers who have expensive debt (with high interest rates), debt counselling is a good option to explore,” says Sager.

Official figures for CPI stood at 4,48%, near the upper end of South Africa’s target range, from a low of 3,27% in 2020. However, electricity and fuel are both expected to increase astronomically, which will have a ripple effect across other goods and services and increase upward inflationary pressure.

“Over the past six years the trend has been that loan sizes have increased, while the number of credit agreements have declined. This means consumers are borrowing more per agreement and reaching the point that they no longer qualify for debt sooner. In an increasing interest and inflation rate environment we expect this to intensify,” says Sager.

He argues that there is a silver lining to the situation which is that people who are in debt are now starting to look for help sooner.

“All our members have indicated that more people are pro-actively seeking help before things get too dire. Some of this is certainly due to a diminished ability to borrow, but our members also work tirelessly to highlight the significant benefits that come with debt counselling, particularly in a higher-interest rate environment.”

Under debt counselling, interest rates on unsecured debt can be reduced from an average of 20%+ to 1-2%. This allows consumers to pay back their high-interest expensive debt faster.

READ: How dealing with debt could do wonders for your mental health

There are other significant benefits to debt counselling. These include:

Consumers’ assets, such as homes and vehicles, are legally protected.

Consumers pay back towards debt what they can genuinely afford.

Rather than having to deal with numerous creditors they deal only with one person, the debt counsellor, who renegotiates all the debt.

By renegotiating the period over which the debt has to be repaid and the interest rates, monthly repayments are reduced.

Sager cautions that while there are many advantages to debt counselling and in South Africa it is effective, well run and highly regulated, consumers need to understand that it is not an instant solution.

“Debt counselling is a long-term commitment, not an easy fix. Just as it takes a while to accumulate debt it also takes time to reduce it. The important thing is to keep making regular payments and, if your circumstances change for the better, to pay more to accelerate the process.”

While under debt counselling, consumers cannot be granted additional credit. This is a worthy trade-off as the consumer is expected to demonstrate they can manage their existing debt in the first place.

For consumers who are in debt counselling, it is critical to inform their debt counsellor if their financial situation changes - for better or for worse. Once a consumer pays off their unsecured debt (and are up to date with their bond repayments if applicable) a clearance certificate is issued via the approval of the National Credit Regulator, and the consumer can again become credit active.

Sager warns, however, that there are unscrupulous enterprises that try to take advantage of impatient consumers undergoing debt counselling and offer ‘debt review removal services’. This is in violation of the National Credit Act and consumers who are tempted could lose the protection from creditors that debt counselling affords.

“Debt counselling has many advantages, but consumers need to understand it is a commitment, not an instant solution. For people who stick with the plan and make their monthly payments it works, well and the vast majority never fall back into unsustainable debt again.”

READ: SA consumers' debts reach alarming levels

Image courtesy of iStock.