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Getting caught in a debt cycle can feel overwhelming and seeking debt relief through debt review may seem like the only option. However, many people still require access to credit or loans during the debt review process for various essential expenses. In this article, we will explore some of the options available for obtaining loans while under debt review in South Africa.
Debt review, administered under the National Credit Act, aims to help over-indebted consumers manage their debt obligations through an impartial debt restructuring process. During debt review, all debt collection efforts against the consumer must stop. One of the key conditions of debt review is that no new credit may be taken on until the review is complete. However, there are still some avenues through which existing debt review clients can access loans if needed.
Understanding the Restrictions of Debt Review
Before looking at potential loan options, it’s important to understand why standard bank loans and credit cards are restricted for people under debt review. The main reasons are:
- Increased risk of default: Those in debt review are already struggling to repay their existing debts. Taking on new loans greatly increases the likelihood of defaulting on repayments.
Protection from reckless lending: The debt review process is meant to protect over-indebted consumers from being sold more credit they cannot afford. This prevents them from slipping further into the debt trap.
Objective of the National Credit Act: One of the main aims of debt review is to help consumers repay their existing debt obligations over time. Taking on new debt would work against this objective.
Impact on debt counseling plan: Additional loans could disrupt the agreed repayment plan setup by the debt counselor and approved creditors. This plan aims to resolve the consumer’s over-indebtedness.
While these restrictions make sense from a consumer protection and debt counseling perspective, there may still be times when individuals under debt review require access to credit. The following sections explore some potential options.
Peer-to-peer (P2P) lending platforms offer an alternative to traditional bank loans by connecting individual lenders directly with borrowers. As P2P lenders are largely unregulated, they tend to have more lenient credit assessment policies than banks.
Some P2P lenders in South Africa, such as Lulalend, Retail Capital and TymeBank, may approve loan applications from people currently under debt review. However, the interest rates charged will generally be higher to compensate for the additional credit risk.
Consumers need to carefully assess whether taking out a high-interest P2P loan is worth the risk of disrupting their debt review plan. P2P loans also need to be declared to the debt counselor for inclusion in the repayment arrangements.
Credit Union or Stallholder Loans
Credit unions are not-for-profit financial cooperatives owned by their members. As community-based organizations, credit unions sometimes offer small, short-term loans at reasonable interest rates to people who don’t qualify for bank loans.
Stallholder microloans provide another alternative. Companies like Wonga, Cash Money and Joinvest provide instant cash loans that don’t require credit or affordability checks – making them accessible for debt review clients. However, the interest charged on such loans is extremely high and they should only be used as a last resort.
Borrowers will need to be upfront about their debt review status and repayment ability will be strictly assessed on an individual basis. Such loans also need to be declared to the debt counselor.
Family or Friends
For emergency or essential needs, borrowing from family and friends can avoid the dependence on expensive loan sharks or errant lenders. Debt review clients just need to be transparent about their financial situation and committed to repaying these informal loans as per agreed terms.
While risky in terms of relationship dynamics, with open communication and mutual understanding, responsible borrowing from trusted personal networks may be a temporary solution in some circumstances. The debt counselor should still be informed about any such arrangements.
Open Communication is Key
Regardless of the loan source, debt review clients will need to practice full disclosure and have an open conversation with their debt counselor about any new credit agreements. This communication serves three important purposes:
- Accountability: Informs the counselor about actual debt obligations to include accurate totals in the repayment plan assessment.
Budgeting assistance: The counselor can provide guidance on affordability and suggest adjustments in spending if additional loan repayments seem unsustainable.
Avoiding legal issues: Failure to disclose new loans could potentially be viewed as concealing debts or interfering with the review process, causing complications or legal problems down the line.
By keeping channels of communication open with the assigned counselor throughout, debt review clients can help manage expectations and get timely assistance if any issues crop up with their repayments.
Can a Consolidation Loan Help?
In some limited cases, taking out a debt consolidation loan to settle multiple existing accounts may potentially be an option worth considering during debt review. However, there are strict criteria:
- You’ll need to qualify for a large enough loan amount to pay off all your credit in one go. Most lenders won’t consider consolidation for less than R30,000 in total debt.
Interest rates on the new loan should be substantially lower than cumulative rates across individual accounts. Otherwise, it may not offer real savings.
Proving ability to repay one monthly instalment versus multiple minimum payments on different accounts. The consolidation test is whether it lightens the repayment strain.
Getting approval from your debt counselor is mandatory. They’ll assess whether it streamlines or complicates adherence to the repayment plan.
While debt consolidation aims to simplify debt servicing, under debt review the circumstances need to clearly demonstrate how it advances the debt review objectives rather than adding more debt burden. Frank discussions with the counselor are important.
Alternative Options to Consider
If a loan or credit line remains impractical during debt review, here are some alternatives that may provide temporary relief:
Community-Based Funds or NGOs
Organizations like Somahsha Trust provide interest-free micro-loans or grants to disadvantaged individuals in times of financial crisis. Eligibility evaluation and strict terms apply.
Retrenchment or Severance Packages
Cashing out a living annuity, pension or retrenchment benefit may release a lump sum that can be used to pay essential living costs until debt review is completed. Professional advice is recommended.
Salary Advance Services
Employees signed up to services like Selpal, Cashflo or PayCurve have the option to access a portion of their net salary early, repayable over 2-3 months. Explore interest rates and administration fees carefully beforehand.
Store Accounts or Laybys
Retailers like Edgars, Jet and Russells offering installment payment plans make larger purchases accessible without credit checks—though penalty fees still apply for late/missed installments.
Budgeting and Saving Strategies
Focusing on cost-cutting, cash budgets and building short-term savings can eliminate dependence on credit during challenging periods. Support from social networks also relieves financial pressures.
Completing Debt Review Successfully
Patience, diligence and cooperation with the debt counselor are key to navigating debt review effectively despite restricting credit access. By keeping all debt obligations disclosed and committing to the agreed repayment plan, clients can work towards the following goals:
- Reducing debt balances and interest costs over time
- Rehabilitating their credit records and scores
- Qualifying for more affordable credit or loans once debt review ends
- Avoiding legal consequences like garnishee orders or administration orders
- Regaining financial freedom and resilience for the future
With openness, responsibility and utilizing alternatives where needed, many seeking debt relief have successfully completed debt review programs. By understanding restrictions upfront and planning contingencies, clients can minimize difficulties of the review process.
While obtaining new loans presents real challenges during debt review, with full disclosure and cooperation some viable short-term options may still be available depending on individual circumstances. However, by focusing on curbing spending, budgeting strictly and sticking to their repayment plans, most clients can avoid overdependence on credit altogether during this period of debt rehabilitation. With perseverance and smart money management, completing the debt review process remains within reach.