Debt Consolidation vs Debt Review in South Africa: Which Fits

The short answer: one is a product, the other is a legal process

Debt consolidation is a credit product. You apply for a single new loan, use it to settle several smaller accounts, and then make one instalment instead of four or five. Your contracts with the old creditors end because the balances are paid, and you keep your normal access to credit.

Debt review, also called debt counselling, is a statutory process created by section 86 of the National Credit Act (NCA). A debt counsellor registered with the National Credit Regulator (NCR) assesses whether you are over-indebted, then negotiates a restructured payment plan with all your credit providers. That plan is confirmed by a magistrate's court or a tribunal order, and while it runs you may not take on new credit.

The practical test is affordability. Consolidation only works if you can comfortably afford the new instalment on the full market rate. If you cannot afford your debts even after they are bundled, no lender should approve the loan, and debt review becomes the realistic route.

What debt consolidation looks like in practice

With the lenders and brokers listed through SimplyLoan, personal loans used for consolidation run from R2 000 to R350 000, with terms from one to six years. Nominal interest rates at partners span roughly 11,75% to 29,25% a year, and the rate you are offered depends on your credit record, income and the affordability assessment the lender is required to do under the NCA.

On top of interest you pay an initiation fee, which the NCA caps and which is usually added to the loan amount, and a monthly service fee capped at R69 including VAT. Most lenders also sell credit life insurance, which covers the balance if you die, become disabled or are retrenched. Ask for the premium in Rands and check whether you already have cover from an employer policy before you accept it.

The arithmetic that matters is simple: a consolidation loan helps if the new rate and term produce an instalment you can afford, without pushing the total cost of credit far above what you would have paid by clearing the accounts individually. The illustrative table below shows how three accounts at different rates can become one instalment over a longer term.

• You stay a normal credit consumer: no court order, no bureau listing for debt review.
• You need an acceptable credit record and provable, stable income.
• The lender pays the old accounts, or you do, immediately after disbursement.
• A longer term lowers the instalment but raises the total interest you pay.

What debt review involves, step by step

Debt review is not a loan and it does not reduce your capital by itself. It restructures the way you pay what you owe, usually by extending terms and negotiating lower interest, so that your total monthly debt repayment fits what is left after living expenses.

A registered debt counsellor works through a set sequence. Fees are regulated and must be disclosed to you before you sign anything, so ask for the full schedule in writing, including the restructuring fee, the after-care fee and the payment distribution charge.

Once your application is accepted, your accounts are flagged at the credit bureaus as under debt review, and credit providers may not grant you further credit while the process runs. In exchange, you get a single affordable payment and protection from creditors enforcing the listed agreements while the process is followed properly.

• Assessment: the counsellor works out your income, expenses and whether you are over-indebted.
• Notification: creditors and the credit bureaus (TransUnion, Experian, XDS) are informed.
• Proposal: a restructured payment plan is put to every credit provider.
• Court order: the plan is made an order of court or a tribunal order so it binds all parties.
• Distribution: you pay one amount to a payment distribution agency, which pays each creditor.
• Clearance: when all restructured debt except a home loan is settled, you receive a clearance certificate and the bureau flag is removed.

The real differences, side by side

The two routes differ in who controls the process, what it costs, and what happens to your credit record.

Consolidation keeps you in charge: you choose the lender, the amount and the term, and you can apply again later or settle early. Debt review hands the structure to a counsellor and a court order, which is exactly why it protects people who cannot negotiate their way out alone.

Cost works differently too. With consolidation you pay interest and fees on new credit at market rates. With debt review you pay counsellor and distribution fees, but the interest on your existing agreements is often negotiated down, and the term is stretched, so the plan may run for years.

• Legal status: consolidation is an ordinary credit agreement; debt review is a statutory process under the NCA.
• Access to credit: unchanged with consolidation; blocked while you are under debt review.
• Who approves it: the lender's affordability assessment versus a debt counsellor's over-indebtedness finding and a court order.
• Exit: settle the loan, or receive a clearance certificate under section 71 of the NCA.
• Protection from legal action: none from a consolidation loan; debt review protects the listed agreements while you keep paying.

When consolidation is usually the better route

Consolidation tends to make sense when the problem is admin and interest rates rather than a shortfall in income. If you are paying three or four accounts on time, several of them at store-card or credit-card rates, and your payslip can carry one instalment at a lower rate, bundling them can save money and reduce the risk of a missed payment.

It also helps when the instalments are front-loaded. Short-term credit and revolving accounts can take a large slice of your salary each month even when the balances are modest. Replacing them with one loan over a defined term gives you a fixed end date.

Two conditions should hold before you apply. First, your credit record must still be reasonable enough to secure a rate at the lower end of what lenders offer, otherwise you simply refinance expensive debt at an expensive rate. Second, you must close the old accounts. A consolidation loan that leaves a cleared credit card open has a habit of becoming a consolidation loan plus a credit card.

When debt review is the better route

Debt review is designed for over-indebtedness: the point at which your required monthly payments exceed what you can pay while covering rent, food, transport, school fees and other necessities. If you are juggling payments, borrowing to pay instalments, or have already received a section 129 letter from a creditor, a consolidation loan is unlikely to be approved and would not solve the underlying gap.

It is also the right route when your credit record already carries defaults or judgments. Lenders price risk, and a damaged record means the rates on offer sit at the top end of the NCA-regulated range, where a new loan makes the monthly position worse rather than better.

Debt review has real costs. You cannot take new credit until you have a clearance certificate, which is restrictive if you need to replace a car or sign a lease that involves a credit check. The plan may run for several years. Those are serious trade-offs, but they are smaller than the cost of garnishee orders, repossession or a judgment.

Why the interest rate decides whether consolidation works

Lenders set your rate from your risk profile, and the gap between the best and worst outcome is large. On the same amount over the same term, the difference between a rate near the bottom of the partner range and one near the NCA maximum changes both the instalment and the total cost of credit substantially, as the table below shows.

Read the total cost of credit column rather than only the instalment. A longer term and a higher rate can produce a comfortable monthly figure while quietly adding years of interest. If the consolidation loan costs more in total than the accounts it replaces and only buys breathing room, treat it as a temporary measure and overpay whenever you can.

Also compare the effective annual rate, not the nominal rate, because the effective figure reflects fees and compounding. Every registered credit provider must give you a pre-agreement statement and quotation setting out the interest rate, the initiation fee, the monthly service fee and any insurance premium. Get that quotation from more than one lender before you commit.

What each route does to your credit record

A consolidation loan is reported like any other credit agreement at TransUnion, Experian and XDS. Settling several accounts and paying one loan on time generally helps over time, although opening new credit and closing old accounts can move your score around in the first few months.

Debt review places a flag on your bureau record for the duration of the process. When the restructured debt is settled, the counsellor issues a clearance certificate and the bureaus must remove the debt review listing. Previous defaults follow their own prescribed retention periods, so your record does not reset instantly.

Withdrawing from debt review part-way through is possible in limited circumstances but it is not a casual decision, and creditors regain their enforcement rights. If you are unsure which route fits, get your free annual credit report from each bureau first and see the full picture before you apply for anything.

How to decide in the next week

Work from numbers, not impressions. List every account with its balance, rate and instalment, add up the total you are required to pay each month, then subtract that from your net income after living costs. The answer tells you which conversation to have.

If there is a surplus and your record is intact, compare consolidation offers. If the figure is negative no matter how you arrange it, speak to a registered debt counsellor. If it is marginal, a tighter budget and a small emergency buffer of even one instalment may keep you out of both.

Whichever route you choose, close the gap that created the debt. Consolidation and debt review both deal with the balance you already owe; neither prevents the next shortfall if the household budget is still short every month.

• Pull your credit report from TransUnion, Experian and XDS and check for errors or old listings.
• Get written quotations from at least two credit providers and compare the effective rate and total cost.
• Confirm whether credit life insurance is compulsory on the offer and what it costs in Rands.
• Ask any debt counsellor for their NCR registration number and a written fee schedule.
• Decide in advance which accounts you will close the day the consolidation loan pays out.

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