Debt counselling is a service that aims to help individuals who are struggling with debt by providing them with financial advice and a repayment plan. It is often seen as a last resort for those who are unable to cope with their debt obligations. However, debt counselling is not a magic solution that can solve all your financial problems. In fact, it can have some serious drawbacks that you should consider before signing up for this service. In this blog post, we will explore some of the disadvantages of debt counselling in South Africa and why it might not be the best option for you.
Costs and Fees
One of the main disadvantages of debt counselling is the costs and fees involved. Debt counsellors charge upfront and monthly fees for their services, which can be quite high. These fees can reduce the amount of money that you can use to pay off your debts. According to the National Credit Regulator (NCR), the maximum fees that debt counsellors can charge are as follows:
- An application fee of R50
- A rejection fee of R300 if your application is rejected
- A restructuring fee of R8,000 or the first instalment of your debt repayment plan, whichever is lower
- A legal fee of R9,000 or 15% of the restructuring fee, whichever is lower
- A monthly after-care fee of 5% of your monthly instalment, capped at R475
These fees can add up to a significant amount over time, especially if you have a large debt or a long repayment period. You should carefully review the costs and benefits of debt counselling and compare them with other options, such as debt consolidation or self-help strategies.
Extended Debt Repayment Period
Another disadvantage of debt counselling is that it can extend your debt repayment period significantly. Debt counselling works by negotiating with your creditors to lower your interest rates and monthly instalments, making your debt more manageable. However, this also means that you will be paying off your debt for a longer period than originally planned, which can have negative consequences. For example, you might end up paying more interest in total, delaying your financial goals, such as saving for retirement or buying a house, and exposing yourself to more risks, such as losing your income or facing unexpected expenses.
Limited Access to New Credit
A third disadvantage of debt counselling is that it limits your access to new credit. When you enter into debt counselling, your credit profile is flagged, indicating that you are under debt review. This means that you cannot apply for any new credit, such as loans, credit cards, or store accounts, until you have completed the debt counselling process and cleared your debt. This can be a problem if you need to access credit for emergencies, such as medical bills or car repairs. You might also miss out on opportunities, such as taking advantage of low-interest rates or special offers. You should have a contingency plan in place to deal with any unforeseen circumstances that might require credit.
Negative Impact on Credit Score
A fourth disadvantage of debt counselling is that it can negatively affect your credit score. Your credit score is a measure of your creditworthiness, based on your credit history and behaviour. It determines your eligibility and terms for credit, such as interest rates and fees. Having a low credit score can make it harder and more expensive for you to access credit in the future. Debt counselling can lower your credit score in several ways, such as:
- Reducing your credit limit and utilisation
- Increasing your debt-to-income ratio
- Missing or making late payments
- Having a debt review flag on your credit profile
Even after you have completed the debt counselling process and cleared your debt, it can take some time to rebuild your credit score. You will have to demonstrate responsible credit behaviour, such as paying your bills on time, keeping your balances low, and diversifying your credit mix.
Not All Debts Are Included
A fifth disadvantage of debt counselling is that it does not cover all types of debt. Debt counselling mainly focuses on unsecured debt, such as personal loans, credit cards, and store accounts. Secured debt, such as mortgage loans or vehicle finance, is usually excluded from debt counselling. This means that you will still have to pay your secured debt separately, in addition to your debt counselling instalments. This can put a strain on your budget and make it harder for you to manage your debt. You should ensure that you can afford your secured debt payments before entering into debt counselling.
Emotional and Psychological Stress
A sixth disadvantage of debt counselling is that it can cause emotional and psychological stress. Dealing with debt can be stressful and overwhelming, affecting your mental health and well-being. Debt counselling can add to this stress by:
- Making you feel ashamed or guilty for seeking debt assistance
- Making you feel hopeless or trapped in your debt situation
- Making you feel anxious or depressed about your financial future
- Making you feel isolated or stigmatised by your family, friends, or society
It is important to seek emotional support and counselling if you are experiencing any of these feelings. You should also try to maintain a positive outlook and focus on the benefits of debt counselling, such as improving your financial situation and achieving your financial goals.
Conclusion
Debt counselling can be a helpful service for individuals who are struggling with debt, but it is not a perfect solution. It has some disadvantages that you should be aware of before opting for this service, such as the costs and fees, the extended debt repayment period, the limited access to new credit, the negative impact on credit score, the exclusion of certain debts, and the emotional and psychological stress. You should weigh the pros and cons of debt counselling and compare it with other options, such as debt consolidation or self-help strategies. You should also consult a qualified financial advisor to help you make the best decision for your financial situation.
