Thembi Kandanga 

Over-indebtedness is defined as “the persistent difficulty, or impossibility, of a household to pay its bills or debts”. In a country with one of the highest youth unemployment rates in the world, it would be irresponsible not to mention the desperate state of affairs that sees people turning to loan and credit facilities to provide for the bare necessities. 

However, there are those who use such facilities in a persistent and irresponsible manner in order to fund lifestyle items, and not needs. Wherever you find yourself on the spectrum, there are two solutions to consider: debt consolidation and debt administration.

Debt Consolidation

Debt consolidation refers to the act of taking out a new loan and immediately using it to pay off all outstanding debts. If you have numerous debts you need to pay every month, each with their own interest rate and repayment terms, you may struggle to afford and remember to pay them all. 

By taking out a debt consolidation loan, you effectively eliminate all your individual debts and are left with a single monthly payment, with one interest rate and a single repayment term.

After consolidation, your debt should be structured in a way that you will be able to easily afford the monthly repayments. The most important factors to consider when restructuring are the interest rate and repayment term. The term of a consolidation loan tends to be longer to make the monthly repayments more affordable. While this is great in the short-term, in the long-term you will be paying much more to service the debt. The same goes for the interest rate being offered. If the consolidation loan is offering an interest that is higher than your current debts, it will be more expensive to pay off the loan. The golden rule of all debt agreements to remember is a longer payment term and higher interest means more money out of your pocket.

The problem with consolidation is that you cannot medicate poor money management with more money. The fact that you are getting money to solve a debt problem does not mean you will automatically be better at managing the one loan. Another downside is that you will still have access to new credit, which means you could open a store account or take out another loan. 

Debt Administration

Debt administration, also known as debt counselling, is a legal process that helps over-indebted people restructure their finances over a longer period of time. 

This happens through a court process, where you voluntarily apply to court to be placed under administration. This is a last-resort option that should not be taken lightly. 

When undergoing this process, you are assigned a debt administrator, who will reach out to your creditors on your behalf and act as an intermediary between them and yourself. The administrator will renegotiate your agreements in an effort to lower interest rates and get smaller repayment amounts. Monthly payments will no longer be made to the creditors directly, but to the administrator through an attachment order that will be issued to collect money directly from your salary. The administrator will then use your money to pay your creditors.

The benefit of debt administration is that your creditors will no longer be able to take legal action against you, or contact you directly.

On the other hand, you won’t be allowed to access any new credit until the debt administration process is concluded and your debt is settled. There will also be a note on your credit report, stating that you’re under debt administration so that creditors know not to provide you any credit or loans. However, this will ultimately benefit you because you will no longer be tempted to take on new debt, allowing you to focus on settling the amount you already owe.

* Thembi Kandanga is a financial planner and coach. She runs her own financial coaching business (FinWellness Solutions), and creates personal finance content on YouTube, Instagram and Twitter.