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Johannesburg – Using your Master Card to pay your Visa is not an uncommon financial strategy.
Recently, however, taking on more debt to settle outstanding debt has reached alarming proportions.
The latest report by the National Credit Regulator shows the value of new unsecured credit (like personal loans and credit cards) rocketed by almost 26% to R10.54bn from the third to the fourth quarter last year, the largest amount on record.
This is of great concern as the numbers indicate that indebted South African consumers are just taking out more debt with a much higher interest rate to finance current debt, and so the debt spiral continues, says DebtBusters MD Luke Hirst.
Despite the economy moving out of the recession, South Africans are still battling. Of the 18.07 million credit-active consumers on record, 10.75 million are in arrears and struggling to meet their debt obligations.
With creditors breathing down their necks, many are taking on new credit to settle outstanding debt.
This type of debt consolidation can be done through unsecured lending (typically a personal loan) or through secured lending (increasing your home loan).
Paying off debt with a personal loan
Andy Gilder of Justmoney.co.za, a website which deals in sourcing personal finance products, says the increase in demand for unsecured debt has been noticeable.
"[Internet] searches for terms like loans have always been high volume in personal finance, with usually over 250 000 local searches a month, but over the last quarter of last year we saw a significant rise."
To match the demand, there certainly has been a mini-boom in small firms offering so-called consolidation loans, often through websites.
Some offer to act as mediators with big financial institutions to secure a loan, using your property as collateral, and settle your debt. Others extend personal loans, promising users that paying off their existing debt with a new loan will give them a much-needed reprieve and save them money.
Many of the websites have long lists of personal testimonials from "clients", some more dubious than others. (One site features a photo of an alleged client, a satisfied"“Mr X of Jhb", whose image was saved under the tag "white guy".)
While the National Credit Act (NCA) offers strict guidelines about affordability, many over-indebted applicants still go for loans from these companies because the information from credit bureaux can be out of date, says Hirst.
While these types of loans will get demanding existing creditors off your back, you may end up with a bigger debt repayment each month. The interest rate on these loans will probably be higher than the average rate you owe on outstanding credit, meaning your monthly debt obligations become higher.
In terms of the NCA, the maximum interest rate that can be charged for personal loans is currently 34.3% a year (repo rate times 2.2 + 20%).
But Hirst feels that unsecured consolidation loans, if granted to someone who can afford to pay them back, do not increase the consumer’s existing debt burden and at an interest rate of between 12% and 15% may offer benefits.
Not only is it easier dealing with just one creditor, you will also save on administration fees and other charges. Given that SA consumers typically have 10 credit agreements, they may be paying more than R500 a month in fees, says Hirst.
Using your home loan to pay off debt
Home loans are the cheapest credit available on the market.
If your property is worth more than your outstanding bond and you can prove that you can afford bigger repayments, you may be able to increase your mortgage and settle your most pressing debt.
Your total monthly debt payment should be lower because of your home loan rate. But because the term of your home loan may still span many years, the final interest bill may be much higher if you don't pay more than the minimum instalment each month.
For example, if you have a personal loan of R20 000 over 24 months at an interest rate of 16%, you will pay R3 500 in interest. If you consolidate that loan with your mortgage, and then pay it off at 10% over 15 years, the total amount of interest will be R18 686.
Some banks, like Absa, now offer specialised home loan consolidation agreements, which allow you to structure a couple of debt accounts in your home loan (each at a different rate, over a different timeframe).
The biggest danger with increasing your home loan to consolidate your debt is that you may lose your home. If you don't cut down on spending or if you take up more debt, you may end up not being able to pay your increased instalments – and default on your home loan.
Usually there is also a cost involved with registering the increased bond as well as banking administration charges, which may include an initiation fee of a couple of thousand rands, a monthly service fee and transaction charges.
Avoid the debt spiral
The trouble with debt consolidation is also that it probably won't address your key financial problems.
While paying off your creditors may provide some initial relief, you will still have to find the money (sometimes even more than you had to in the past) to pay your debt. And often, the initial reprieve lulls consumers into thinking they can rev up spending.
If you have trouble repaying debts, your first port of call should be your creditors. Explain your situation and try to negotiate better repayment terms.
Failing that, consider debt counselling or contacting a debt management company. More than 170 000 consumers have applied for counselling and over recent months there has been a sharp increase.
A debt counsellor who will go through your affairs and decide whether you are over-indebted. This means that your expenses (living and debt servicing) are higher than your income.
The counsellor will then work out a repayment plan - proposing smaller instalments over a longer period or postponing repayments - which will be submitted to your creditors.
If they don't agree to the plan, the counsellor can go to the Magistrate's Court and force them to accept it.
- Fin24.com
Recently, however, taking on more debt to settle outstanding debt has reached alarming proportions.
The latest report by the National Credit Regulator shows the value of new unsecured credit (like personal loans and credit cards) rocketed by almost 26% to R10.54bn from the third to the fourth quarter last year, the largest amount on record.
This is of great concern as the numbers indicate that indebted South African consumers are just taking out more debt with a much higher interest rate to finance current debt, and so the debt spiral continues, says DebtBusters MD Luke Hirst.
Despite the economy moving out of the recession, South Africans are still battling. Of the 18.07 million credit-active consumers on record, 10.75 million are in arrears and struggling to meet their debt obligations.
With creditors breathing down their necks, many are taking on new credit to settle outstanding debt.
This type of debt consolidation can be done through unsecured lending (typically a personal loan) or through secured lending (increasing your home loan).
Paying off debt with a personal loan
Andy Gilder of Justmoney.co.za, a website which deals in sourcing personal finance products, says the increase in demand for unsecured debt has been noticeable.
"[Internet] searches for terms like loans have always been high volume in personal finance, with usually over 250 000 local searches a month, but over the last quarter of last year we saw a significant rise."
To match the demand, there certainly has been a mini-boom in small firms offering so-called consolidation loans, often through websites.
Some offer to act as mediators with big financial institutions to secure a loan, using your property as collateral, and settle your debt. Others extend personal loans, promising users that paying off their existing debt with a new loan will give them a much-needed reprieve and save them money.
Many of the websites have long lists of personal testimonials from "clients", some more dubious than others. (One site features a photo of an alleged client, a satisfied"“Mr X of Jhb", whose image was saved under the tag "white guy".)
While the National Credit Act (NCA) offers strict guidelines about affordability, many over-indebted applicants still go for loans from these companies because the information from credit bureaux can be out of date, says Hirst.
While these types of loans will get demanding existing creditors off your back, you may end up with a bigger debt repayment each month. The interest rate on these loans will probably be higher than the average rate you owe on outstanding credit, meaning your monthly debt obligations become higher.
In terms of the NCA, the maximum interest rate that can be charged for personal loans is currently 34.3% a year (repo rate times 2.2 + 20%).
But Hirst feels that unsecured consolidation loans, if granted to someone who can afford to pay them back, do not increase the consumer’s existing debt burden and at an interest rate of between 12% and 15% may offer benefits.
Not only is it easier dealing with just one creditor, you will also save on administration fees and other charges. Given that SA consumers typically have 10 credit agreements, they may be paying more than R500 a month in fees, says Hirst.
Using your home loan to pay off debt
Home loans are the cheapest credit available on the market.
If your property is worth more than your outstanding bond and you can prove that you can afford bigger repayments, you may be able to increase your mortgage and settle your most pressing debt.
Your total monthly debt payment should be lower because of your home loan rate. But because the term of your home loan may still span many years, the final interest bill may be much higher if you don't pay more than the minimum instalment each month.
For example, if you have a personal loan of R20 000 over 24 months at an interest rate of 16%, you will pay R3 500 in interest. If you consolidate that loan with your mortgage, and then pay it off at 10% over 15 years, the total amount of interest will be R18 686.
Some banks, like Absa, now offer specialised home loan consolidation agreements, which allow you to structure a couple of debt accounts in your home loan (each at a different rate, over a different timeframe).
The biggest danger with increasing your home loan to consolidate your debt is that you may lose your home. If you don't cut down on spending or if you take up more debt, you may end up not being able to pay your increased instalments – and default on your home loan.
Usually there is also a cost involved with registering the increased bond as well as banking administration charges, which may include an initiation fee of a couple of thousand rands, a monthly service fee and transaction charges.
Avoid the debt spiral
The trouble with debt consolidation is also that it probably won't address your key financial problems.
While paying off your creditors may provide some initial relief, you will still have to find the money (sometimes even more than you had to in the past) to pay your debt. And often, the initial reprieve lulls consumers into thinking they can rev up spending.
If you have trouble repaying debts, your first port of call should be your creditors. Explain your situation and try to negotiate better repayment terms.
Failing that, consider debt counselling or contacting a debt management company. More than 170 000 consumers have applied for counselling and over recent months there has been a sharp increase.
A debt counsellor who will go through your affairs and decide whether you are over-indebted. This means that your expenses (living and debt servicing) are higher than your income.
The counsellor will then work out a repayment plan - proposing smaller instalments over a longer period or postponing repayments - which will be submitted to your creditors.
If they don't agree to the plan, the counsellor can go to the Magistrate's Court and force them to accept it.
- Fin24.com
