Share

How to tackle debt

Johannesburg - Fin24.com Money Clinic received this question from a user:

"Which of my debts should be paid off quicker: credit card, property loan, car, personal loan or overdraft?"

A no-brainer, reckoned Ebie Visser of Debtdoc.co.za.

Always pay off short-term debt such as credit cards, loans and overdrafts with excess cash first, then vehicles and lastly property loans.

"Why? Invariably your interest rates on short-term debt will be much higher than long-term debt, making such debts much more expensive to service."

Go through your statements to see what interest you are paying.

Interest rates on credit cards (of up to 24%) are usually highest, and a home loan (up to 15%) the lowest.

The most effective way of tackling your debts is by targeting one at a time.

Start by paying all the minimum monthly payments, but allocate an extra amount - as much as you can afford - to settle your debt with the highest interest rate.

When you've paid off that debt, direct the monthly minimum payment of that debt plus the extra cash to the next priority (the debt with the next highest interest rate).

Tackling the debt with the highest interest rate will give you the most cost savings and pay off your debt faster with less money, said Colin Brazendale of Debt Counselling Help.

But it may take a long time - even years - to pay off the debt with the highest interest rate, which many people find discouraging.

Enter the so-called snowball effect.

The snowball effect involves tackling the smallest debt first - not the debt with the highest interest rate.

It will be take much less time to pay off the first debt, which will give you a quick win and more confidence about tackling the rest.

As you finish with one account, you roll over the money to the others.

This will keep you motivated, because you will see the number of accounts disappearing faster, said Brazendale.

However, research still shows that, in the long run, tackling the high interest debt first is more cost effective.

Consolidation

Many people hope that debt consolidation will help to settle their debts.

Debt consolidation usually means that you increase your home loan, or take out a new personal loan, to pay off your existing debts.

Essentially, a lending institution will provide a homeowner with a home equity loan that will help "consolidate" his or her outstanding debts into one monthly payment, said Mark Fulton of National Consumer Relief.

"The homeowner can benefit from a lower overall interest rate and tax break; however, many consumers' financial situations worsen at this time, causing them to unfortunately lose their home."

But if debt consolidation doesn't mean that you are paying less each month to settle your debts, it is not an effective option.

Whatever approach you take - make debt your priority.

But don't borrow more money to settle a debt, said Fulton.

"All debts attract interest, penalty interest and legal costs when you default or skip payments. It is not advisable to pay Paul this month and then Peter next month, as the balance amount of your debt escalates in the defaulting month."

Brazendale also warned that you should always pay off your debt before thinking about saving.

"The best saving you can make is by paying off your debt first. The reason is that the interest on debt is much higher than savings accounts.

"So if you are paying 20% interest on your credit card and you make payment towards your debt, your are saving 20% per month tax-free. That is better than earning 10% and paying tax on the interest earned, making the return less than 10%."

If your are already struggling to repay the minimum monthly amounts and have creditors breaking down the door, perhaps consider going for debt counselling.

A debt counsellor will restructure your credit agreements so that they are more affordable, said Fulton.

- Fin24.com

Contact:

We live in a world where facts and fiction get blurred
Who we choose to trust can have a profound impact on our lives. Join thousands of devoted South Africans who look to News24 to bring them news they can trust every day. As we celebrate 25 years, become a News24 subscriber as we strive to keep you informed, inspired and empowered.
Join News24 today
heading
description
username
Show Comments ()
Rand - Dollar
18.90
+0.2%
Rand - Pound
23.86
+0.2%
Rand - Euro
20.36
+0.3%
Rand - Aus dollar
12.31
+0.2%
Rand - Yen
0.12
+0.2%
Platinum
908.05
0.0%
Palladium
1,014.94
0.0%
Gold
2,232.75
-0.0%
Silver
24.95
-0.1%
Brent Crude
87.00
+1.8%
Top 40
68,346
0.0%
All Share
74,536
0.0%
Resource 10
57,251
0.0%
Industrial 25
103,936
0.0%
Financial 15
16,502
0.0%
All JSE data delayed by at least 15 minutes Iress logo
Company Snapshot
Editorial feedback and complaints

Contact the public editor with feedback for our journalists, complaints, queries or suggestions about articles on News24.

LEARN MORE
Government tenders

Find public sector tender opportunities in South Africa here.

Government tenders
This portal provides access to information on all tenders made by all public sector organisations in all spheres of government.
Browse tenders