When you're overwhelmed by debt, choosing the right strategy to manage your financial situation is crucial. Two common options are debt consolidation and debt review.
In this blog post, we’ll delve into the differences between a debt consolidation loan and debt review, and explain why debt review might be the better choice for those struggling with high interest rates and multiple debt repayments.
What's the difference between debt review and debt consolidation
Debt Consolidation involves taking out a new loan— a debt consolidation loan—to pay off existing debts. This process combines multiple debts into a single loan with a potentially lower monthly instalment.
Debt Review, on the other hand, is a formal process designed for over-indebted individuals, overseen by a Debt Counsellor. It is also a way of consolidating your debt, but without having to take out a loan.
This process involves a thorough assessment of your financial situation, followed by the creation of a repayment plan. During debt review, your debt counsellor negotiates with creditors to restructure your debt, often resulting in reduced monthly payments and interest rates. Importantly, debt review provides legal protection against legal action from creditors.
Debt Counselling vs Debt Review: What’s the Difference?
Debt counselling and debt review refers to the same process. It is a legal process that helps you consolidate your multiple debts into a single, reduced monthly payment and also protects you from creditors harassing you.
Why Debt Review May Be the Better Option
Here’s why debt review often stands out as the more advantageous choice compared to debt consolidation:
1. Comprehensive Debt Management:
- Debt Consolidation: A debt consolidation loan combines your debts but doesn’t address the root causes of financial issues. If you’re unable to manage your debt effectively, you might end up in the same situation or worse. You also need to be approved for the loan. If you already have a poor credit score you probably won't get the loan, or you'll get it with a high interest rate.
- Debt Review: Provides a holistic approach by assessing your entire financial situation. Your Debt Counsellor creates a detailed repayment plan that fits your budget and helps address the underlying issues without having to take on extra debt.
2. Legal Protection:
- Debt Consolidation: Does not offer protection from legal action. Creditors can still pursue legal action if you fail to meet the new loan terms.
- Debt Review: Offers legal protection against creditors. While under debt review, creditors cannot take legal action, giving you peace of mind and space to work on resolving your debts.
3. Reduced Monthly Repayments:
- Debt Consolidation: While it can lower your monthly payment if you get a loan with better terms, you might end up paying more over time if the loan term is extended or if your interest rates are very high.
- Debt Review: Often results in reduced monthly payments and potentially lower interest rates, as your Debt Counsellor negotiates directly with creditors to create a more manageable repayment plan.
4. Better Financial Restructuring:
- Debt Consolidation: Simply consolidates your debt without restructuring it. If your financial situation doesn’t improve, you could still face difficulties.
- Debt Review: Involves restructuring your debt to make it more manageable. This process includes renegotiating credit agreements and creating a repayment plan that suits your financial capacity.
Debt Consolidation Without Debt Review: A Riskier Choice
Debt consolidation without debt review might seem appealing for its simplicity, but it comes with risks:
- No Legal Safeguards: Without the legal protection provided by debt review, creditors may still pursue legal action if you default on your consolidation loan.
- Potential for Increased Debt: If you consolidate your debt but don’t address the underlying financial issues, you might find yourself accumulating new debt while struggling to manage the consolidated loan.
- Limited Financial Restructuring: Unlike debt review, debt consolidation doesn’t offer the benefit of restructuring your debt. You may end up paying more over time if you don’t secure favorable loan terms.
Managing Your Debt: The Benefits of Debt Review
Choosing debt review can be a game-changer for managing your debt. Here’s why:
- Structured Repayment Plan: Debt review provides a clear and manageable repayment plan tailored to your financial situation, helping you pay off your debt.
- Improved Financial Health: By restructuring your debt and negotiating better terms, debt review can improve your overall financial health and potentially your credit score in the long run.
- Peace of Mind: Legal protection against creditors during the debt review process allows you to focus on resolving your financial issues without the added stress of legal threats.
What are the disadvantages of debt review?
A common disadvantage of the debt review process is that you will temporarily not have access to credit. It's very important to note that debt review is not a life sentence and this is only temporary. Once you've successfully completed the debt review process, you will be able to apply for credit again.
In fact, you will probably be in a better position to do so because debt review is a way of rehabilitating your credit score.
Conclusion
While both debt consolidation and debt review offer ways to manage debt, debt review stands out as a more comprehensive and protected solution. By providing a structured repayment plan, negotiating better terms, and offering legal protection, debt review can help you regain control of your finances and work towards a debt-free future. If you’re struggling with high interest rates and multiple debt repayments, debt review may be the better choice to effectively manage your debt and pave the way for financial stability.