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Debt Management Explained

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Debt Management

Micro-lending is no longer a solution, but an added crisis in South Africa, more so amidst the COVID-19 pandemic. Corruption, unemployment, poor lending practices and the unequal distribution of income are some of the factors contributing to South African households’ debt crisis. 

There are a few relief measures at the disposal of consumers struggling to deal with their debt. By no means are these measures quick fixes, but it may be beneficial in the long term if you stay committed. 

Debt management is beneficial to South Africans who are struggling with debt, but not yet classified as “over-indebted”. Many financial institutions can assist consumers in creating a monthly budget and debt management plan. The aim of debt management is to help consumers solve their debt issues by negotiating with credit providers and initiate a repayment plan. 

The Advantages of Debt Management

Many financial institutions can assist consumers in drafting a debt management plan. A debt management plan involves assessing a consumer’s financial situation and tailoring that plan to the individual’s situation. It keeps consumers in control of their finances and may increase their cash flow. The company or institution will educate the consumer on how to manage debt and eventually become debt-free. 

Debt Management Tips

It is important to be mindful of your monthly income and expenses, as well as analyse your debt repayments. 

Create a budget and stay committed to it. 

It might seem ineffective at first, but it helps to spend mindfully. Take one day to make a list of all your expenses, even groceries. Most retailers either have online stores or provide their prices online. Take note of which retailers have specials, either in the middle or at the end of the month. 

A tip: If you receive a fixed income, try to purchase all your groceries for the month in one day to avoid purchasing unnecessary items day-to-day. Some retailers also offer discounts when purchasing in bulk. Make a list of all other expenses such as tuition fees, utilities, insurance, etc. 

Negotiate repayment terms. 

Sometimes a stern budget or reducing expenditure is not enough to solve all financial issues. Consumers should consider approaching their credit providers. Some credit providers might be willing to negotiate on the amount payable per month. This can be done through a debt specialist company who is willing to negotiate with credit providers on behalf of the consumer. 

Contact a debt care centre.

Many financial institutions (e.g., banks and debt management companies) offer professional help to assist consumers with their financial stress. It is important to note that some are not debt counsellors. They will only advise on the best possible solutions for a consumer’s financial issues, and not be able to assess if the consumer is over-indebted.

Debt Consolidation Loans

A consumer who is not over-indebted may consider applying for a debt consolidation, which is simply a loan taken out to pay all other loans. The consumer will then only pay off the consolidation loan. However, it is important to note that the interest rate can be high. 

Debt Review / Debt Counselling

When applying for debt review (also referred to as debt counselling), the consumer must be able to prove that he or she is over-indebted. A debt counsellor will assess the consumer’s financial situation and conclude whether that is indeed the case. If the debt counsellor concludes that the consumer is over-indebted, a debt rearrangement proposal will be drafted and sent to all the consumer’s credit providers. 

Once it is made an order of the court, the consumer’s assets remain protected and credit providers are prohibited from instituting legal proceedings. The consumer’s total amount payable per month is greatly reduced.  However, if a consumer does not abide by the rearrangement plan, he or she will no longer enjoy legal protection and a credit provider may proceed with legal action. Only one monthly payment is made to the debt counselling company, who ensures that it is distributed among all the relevant credit providers. 

South Africans struggling with debt will not be able to lift this burden without proper advice and solutions. It is important to seek professional assistance before falling behind on payments. 

National Credit Regulator

The National Credit Regulator offers the following additional tips to consumers

  • Understand the cost of credit. The cost of credit includes interest rate, once off initiation fees, monthly service fees, credit life insurance, etc. To understand the cost of credit, consumers should be given a pre-agreement statement and quotation (valid for 5 business days). These should disclose all the costs involved in the credit agreement that a consumer signs.
  • Do not sign a blank credit agreement/document – read the content first, understand and ask relevant questions. You may sign only when satisfied.
  • Be honest and truthful when applying. If you are dishonest about your monthly expenses when applying, you will lose the protection offered in the National Credit Act if you need to raise reckless lending in the future.
  • Borrow only when it is absolutely necessary to do so and avoid using credit for consumables such as groceries.
  • Understand credit life insurance – Familiarise yourself with the terms and conditions of the credit life insurance to avoid surprises when you mostly need the cover from the insurance. Credit life insurance can be a life saver when you cannot repay the debt for reasons such as loss of income, unemployment, disability etc.
  • Pay your debts on time – Paying late or not paying the full instalment will adversely/negatively affect your credit report and in turn your ability to qualify for credit in the future. If you think you cannot meet your monthly instalments, contact your credit providers immediately and try to re-arrange payments. Do not wait until you skip payments.
  • Check your credit report often- You are entitled to a free credit report once a year.
  • Contact the NCR for a free educational workshop – The NCR conducts workshops for consumers around the country at no cost.