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According to the Consumer Credit Market Report (CCMR) quarterly bulletin published by NCR, South Africa’s gross debtors’ book of consumers’ credit stands at R2.04 trillion as of March 2021. The figure could have been higher should the 62.47% of new credit applications where not rejected due to affordability-related issues. The high level of new loan application rejections shows that there is a strong appetite for consumer credit despite worrisome debt levels across South Africa. One of the solutions postulated in the National Credit Act that may help address and effectively reduce the gross national consumer debt is debt counselling.

Has debt counselling failed?

Over the years, when done properly through the assistance of a professional debt counsellor: debt counselling may help reduce your monthly instalments, legally protect yourvehicle and property from repossession, shield you from harassing debt collectors, reduce interest rates, takes away the ability to borrow thereby allowing you to pay off your current debt before applying for a new loan.

However, debt counselling has had its own myths in the eye of an average consumer who has often heard of many shocking horror stories about debt counselling. The purpose of this article is to highlight most common reasons behind why debt counselling seems to have failed amongst some ordinary consumers.

Myths on why debt counselling seem to have failed

Misleading marketing practices – Some rogue debt counselling firms are misleading consumers by advertising deceiving information on social media platforms such as Facebook and Twitter. Consumers are persuaded into signing up for debt counselling under the false pretence that they will be getting a consolidation loan. These advertisements misrepresent the primary objectives of the National Credit Act (NCA) regarding the provisions of debt counselling as a debt relief measure. This has brought debt counselling into disrepute by giving it a bad name. False advertisements further undermine efforts made by real and professional debt counsellors who genuinely put the interests of over-indebted consumers at the forefront.

It takes longer to repay debt – Financially there is a relationship between debt repayment period and interest rates. The shorter the repayment period of a loan, the higher is the interest rate charged and vice-versa. Take for instance interest charges on a payday loan which can be as high as 60% per annum yet the repayment term varies from one month to three months at most. To reduce your monthly installment under debt counselling, the debt repayment term is extended to cover a longer period. It seems as if it now takes longer to pay off your debt because of paying smaller amounts each month. However, as a consumer you would have saved huge in interest payments because of negotiations with creditors, meaning you will pay off less debt in the long term. Contrary to the general perception, should your financial situation improve you are allowed to make extra payments towards your debt repayments whilst under debt counselling and significantly reduce your repayment period.

You will not be able to apply for a loan again – It is true that consumers will not be able to acquire more credit whilst under debt counselling, however only for the duration of the debt counselling process. This is because income and living expenses must be carefully managed to ensure that you stay on track. It appears as if it’s a disadvantage but having access to credit is what got you into this situation in the first place. The prime objective is to teach consumers to live within their means, a lesson which will be of benefit in the long run. As soon as your name is cleared from debt counselling, it is very easy to access credit if you have affordability. All what is required after debt counselling is for you to rebuild your credit score as you will be starting on a new slate.

Debt counselling negatively affects your credit report – Although debt counselling will have an impact on your credit score, rest easy, its only temporary. You will be listed on all credit bureaus as being under debt counselling making it difficult for you to acquire more credit until all your debt is settled and a clearance certificate issued by your debt counsellor. The good thing is debt counselling will allow you to pay off your debts in approximately five years after which you start building your credit score again. The flag is removed once the process is completed and there will be no record that you were under debt counselling before.

Debt counselling does not reduce the debt you owe – Debt counselling does not erase your debt, it only has the effect of restructuring your debts making it easier to repay, not reducing them. Thus, over-indebted consumers are still expected to pay off their debt. Debt counselling is not some form of a way to punish credit providers. Remember a creditor gave you money in good faith therefore you must repay it back in good faith.

Debt counselling remains the single most powerful tool for those who want to escape from the jaws of a vicious debt trap. The most important thing is to find a professional debt counsellor, one who has an advanced knowledge of finance. If done properly, debt counselling provides affordable legal protection, a peace of mind and a general financial well-being.