- Posted by: Andre Misrole
- Category: Uncategorised
This is probably the biggest misconception regarding debt counselling amongst all of them…
This monumental lie is caused by the bigger debt counselling companies who don’t practice transparency, and I’d go so far as to say, integrity with potential, as well as their existing clients.
Some new companies who are trying to solicit clients who are already under debt review, or who are considering debt review due to struggling financially with debt are trying to get them to not work with registered debt specialists, but with them instead.
The problem with these guys is that they will only assist you if you have a bond, and they’ve come up with creative financing that could potentially prevent you from losing your house.
Now I’m all for creative financing, as we’ve had quite a few cases over the years where we had to be creative in the way we assist our clients as well.
But please just be careful if you’re considering them and eliminate as much red flags as possible. The first one is that you should never work with a company that is not registered and audited by the NCR (National Credit Regulator).
I’ve noticed they’re spewing misconceptions in their marketing, especially the lie that ‘Debt Counselling Takes 5 Years’…
Now I don’t want to sound like salty Sarah, but where this misconception and blatant lie about debt counselling comes from, is the bigger debt counselling companies who operate on the ‘call center model’.
They’re just too concerned about chasing daily targets that they forget about the essence of this business, and that we are dealing with personal finance, so this is about as personal as it gets.
But they’ve made it as impersonal as it can possibly get…
The truth is that a consumers debt counselling term is entirely, and I mean, entirely, dependent on them and nobody else… Not even the debt counselling company they choose to work with!!
So where did this misconception or lie come from…??
As debt counsellors, we get paid in two ways…
Firstly, we get paid for a restructuring and renegotiation fee. Which we are entirely and wholeheartedly entitled to, provided we do the job properly!! (Yes, some debt counsellors mess up monumentally here)
This process is when we renegotiate all your existing credit agreements (contracts) with your creditors by extending the terms and negotiating and fighting for lower interest rates.
We do this to ensure we get the lowest possible, but more importantly, the most affordable instalment for you, the consumer or client for that matter…
As you can imagine, this entails a lot of administration, but I’m not complaining, as it’s our job and exactly what we get paid for.
The second way we get paid, is through a monthly after care fee, which is essentially a service fee. This is all worked into your monthly installment by the way, and there’s nothing that you need to pay your debt counsellor over and above, or additionally to your installment.
This after care or service fee, is 5% of what we’ve managed to successfully negotiate on behalf of our clients with their creditors.
Our fees are however capped by the NCR (National Credit Regulator). So, there is no room for exploitation of consumers under financial duress and cannot surpass a certain threshold.
This aftercare or service fee is for various reasons…
Like dealing with creditors who continue to harass clients, or attorneys, or debt collectors for that matter.
Debt Counsellors have a fiduciary responsibility to deal with whatever queries or issues their clients have, pertaining to their debt of course.
We are also to ensure everything runs smoothly each month with the PDA (Payment Distribution Agency), ensuring all your creditors are paid.
So essentially, we ensure everyone gets paid timeously and accurately, ensuring you don’t get any nasty sms’s or calls from creditors, or that your accounts have lapsed or been terminated from debt review, without your knowing due to an admin or system issue, resulting in your accounts not being paid.
Now that you know how we as debt counsellors get paid, here’s where this misconception of debt counselling taking five years comes from…
You see, now that I’ve informed you of how debt counsellors get paid, regarding the after care or service fee, which is paid monthly by the PDA to your debt counsellor…
Take this into consideration…
Many of the bigger debt counselling companies just see their clients as a source of revenue, and they don’t build lasting relationships with them, because all they care about is the money, they can make off their clients, as I’ve stated earlier in this post.
So, because many of them (not all debt counsellors) are just after the money, it makes no sense to inform you that you don’t have to be under debt counselling for 5 years.
If they let you know that your term is dependent on you and can take anything from 12, 24 to 36 months, or less, depending on the amount of debt you have and the amount of the installment you’re paying each month, they shortchange themselves.
What do I mean they shortchange themselves…??
Let me give you an example…
Let’s say you applied for debt counselling because you have R250,000 worth of unsecured debt, which you’re struggling to pay.
For this example, I’m going to leave out the technical stuff like interest rates, DC, PDA and attorney fees etc, but I promise I will get my point across in a manner that you will fully understand.
With a total debt of R250,000, your debt counsellor provides you with a term of 60 months, (5 years) of which your instalment will be R4166.
You agree to this and you’re just happy because with the additional interest, you’d be paying closer to three times that amount, again, just for arguments sake, leaving out the interest rate and other fees.
As explained earlier, your debt counsellor will get roughly 90% of your first installment of R4166 for their restructuring and renegotiation fee, then 5% of your installment each month, if you make your payment, which will be roughly R208 for aftercare fees which goes to your debt counsellor.
So, they get paid once off for restructuring, and monthly for a service or after care fee as it is more commonly known.
Now, here’s their logic, from a business perspective…
As a client, you are now seen as a source of revenue, as you will have a value to them of approximately R12,480, over a 5-year period, onto their books.
Now this may not seem like much, but apply this to hundreds of clients a month, and you’re making some serious cash…
Again, this isn’t technically unethical, but it does lack TRANSPARENCY!!!
Why do I say that?
Now, in this example above, the client who has the R250,000 debt, will be happy to pay the lower installment in the beginning, because they come from a very stressful time where they literally couldn’t make ends meet, but now, thankfully to their new installment, they have a lot more breathing room.
They can finally start to see a little light at the end of the tunnel…
But here’s where the problem starts to come in…
Naturally, like I explain to all my potential clients in my consultation, where I practice actual debt counselling, their financial circumstances will change, and change for the better.
During a year, they might get an increase, a promotion or they may even change jobs and get a much higher salary.
This is quite normal in the job market and happens every single day, so this is not a far-fetched concept.
I then go on the explain to my potential clients (who are still busy making up their minds as to whether they want to work with me or not) that in a year or two, due to increases, bonuses or promotions, they will have more money available to them, due to this.
To which they obviously agree, because like I said, it is normal in the job market.
I then go on to explain to them that, they then have the option of increasing their installment, which will have a positive effect on drastically shortening or reducing their term, however, it is entirely up to them, and it is not a pre-requisite at all.
Now again, this concept isn’t unheard of and its basic math, so you don’t have to be an economist or accountant to know that just by increasing your installment by even 10% or 20% will have a positive effect and reduce the term drastically.
So, let’s say in our example above, with the consumer who has R250,000 worth of debt and got their debt restructured for five years @ an installments of R4166, they decide to increase their installment by R500 per month, so they are now paying a total of R4666, form their second year.
So, for the sake of context, remember, for their first year, they were paying R4166, and after getting an increase, they decided to increase their debt review installment by R500 per month, bringing it to a monthly installment of R4666, from their second year.
Now, their debt was initially restructured for 5 years, and they just completed their first year paying R4166 per month.
From year 2, they will be paying R4666…
Initially, they have 4 years left from their original term set out by their debt counsellor, but because they increased their installment by R500, to make it R4666, their remaining term is now only 3.5 years, instead of 4.
So just by adding an additional R500, they shaved 6 months off their debt review term.
Had they increase their installment by R1000, they would have shaved an entire year off their initial debt review term.
Confused a little…???
Let me run the number by you below so you can see for yourself.
Initial debt – R250,000
Term – 5 years (given by the initial debt counsellor)
Installment – R4166
After care fee – R208 (R208 x 60 months = R12,480)
After paying R4166 for 12 months, the total debt is now roughly R200,000
*Consumers decides to increase their installment by an additional R500
Initial debt – R200,000
Term – 3,5 years
Installment – R4666
After care fee – R208 (R208 x 42 months = R8,736)
*Debt counsellor now gets R1,248 less than they initially calculated.
Meaning, R200,000 / R4666 = 42 months (3.5 years)
= a reduced term of 6 months
*If the consumer decided to increase their installment in year two by an additional R1000
Here’s what the figures would resemble
Initial debt – R200,000
Term – 3.2 years
Installment – R5166
After care fee – R208 (R208 x 38 months = R7,904)
*Debt counsellor now gets R1664 less than they initially calculated.
Now don’t crit on my on my mathematics, but the whole point that I wanted to make was that, if you ever come across a debt cousnellor or anyone for that matter that says your debt counselling term is a definitive five whole years, now you know its absolute rubbish!!
For this very reason, now you can see that if you or a potential client should choose to increase your installment (and you have every right to do so) you can drastically reduce the term of your debt counselling term.
I’ve heard many stories about debt counsellors who discourage their clients and potential clients from doing this, and they come across as being concerned about the financial well-being of the client, but now I’ve shown you that all they care about is their bottom line and you, being a revenue stream that they want to keep on their books for the maximum time possible.
Now lest not be fooled here, and I don’t want to come across as being a debt counselling fairy god mother, Johan and I run a business and we have actual expenses and staff to pay, so we too need to make money.
The monumental difference is, WE ACTUALLY PRACTISE RESPONSIBLE DEBT COUNSELLING and more importantly, WE ARE 100% TRANSPARENT WITH OUR CLIENTS.
We ensure that we do what’s best for our client first, then for our business, because at the end of the day, it’s’ just good business practice and it always pays in the long run.