If you have a debt problem, should you consider debt counselling or a debt consolidation loan?
Debt counselling is best if you have no other alternatives because you cannot afford your debt repayments and your living costs.
A debt consolidation loan may help you if you can manage to pay down your debts and are disciplined enough to do so.
Debt consolidation may not be an option for you if you already have defaulted on your debt repayments and your credit record has been negatively affected.
Here's a quick summary of the differences between the two options for tackling your debt.
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Debt consolidation |
Debt counselling | |
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What is it?
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The process of converting multiple loans and credit agreements into a single loan. |
A legal process you go through with a debt counsellor who rearranges your debts to make them more manageable. |
| How do you do it? |
You apply for a debt consolidation loan from a provider of such loans. |
You apply to a debt counsellor. |
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Are there any qualifying criteria?
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No, but you may not qualify for such a loan if your credit record is poor, or you have had judgments against you. |
You must be over-indebted and have a steady income. |
| If creditors are harassing me over arrear repayments will this help? |
If you use the loan to pay off the debt and arrears, yes. But you will also need to keep up with the repayments on the new loan. |
Yes, creditors who agree to the rearrangement of your debts must stop harassing you. Debt review can prevent you having the likes of your home or car repossessed. |
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What are the costs?
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A debt consolidation loan will have an initiation fee and an ongoing administration fee in addition to the interest that you will be paying on the outstanding amount. |
When you go into debt review you will pay an initial debt counselling fee and ongoing after care fees, possibly legal fees and fees to a payment distribution agent (PDA) if you use one. |
| Does it simplify my repayments? |
Yes, your debt from multiple creditors is consolidated into one loan from one creditor. |
You can pay one amount to a PDA every month and they pay each of your creditors. You still need to monitor your credit agreements. A debt counsellor can suggest you use a debt consolidation loan but may not be the credit provider that provides the loan. |
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Will my loans and credit be assessed for reckless lending?
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No. |
Yes. A debt counsellor may be able to get some of your debts set aside if these were extended to you without the credit provider checking you could afford the credit. |
| Will it save me money? |
If the terms of the loan are favourable, you could pay less in interest over the term of the consolidation loan. |
Credit providers may reduce the interest rates on debts in debt review or the debt repayment period may be extended, which could increase the interest you pay. |
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Can I still get credit?
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Yes. |
No, under debt review you are unable to access any further credit other than a consolidation loan until all of your debts included in the debt review process, with the possible exception of your home loan, are paid in full. |
| Where can I find out more? |
