Whenever we hear the word debt, we automatically shake in our boots and picture the Red Ants hunting us down to repossess our assets when we default on our payment obligations.
According to an article published by MoneyWeb South Africa has 25 million active consumers of credit and more than 10 million are behind on their payments. In a country where real wages (salaries and wages in terms of the amount of goods consumers can buy) are constantly decreasing, interest rates and increasing and with the deterioration of the rand, it’s safe to say that we cannot afford to be spending money we don’t have. Don’t get me wrong, debt can be good if you’re using it to lever up your business or if you are using it to pay for a new car but even then, tread with caution.
There are of course the more prominent forms of debt such as a mortgage or car finance but the more subtle yet impactful form of debt is credit card debt. It takes an impulsive shopaholic to apply for credit at their favourite clothing store and just like that you’re in debt. As the bill of, let's say R2500 comes in every month with a record of all your shopping history, you may look at an item you took on credit that you have not even worn on any occasion and start to regret your decision. When it comes to credit card debt, consumers must really assess if the products they want to obtain credit for are worth it. Remember, credit card institutions live for the moment you default on your payments because that's when they claw their fingers into charging higher interest.
The first thing that you definitely shouldn’t buy on credit is food. Imagine being blacklisted because of debt that accumulated from the different restaurants you went to and swiped your credit card to pay. As trivial as it sounds, it ends up being a lived reality for many. When it comes to applying for accounts at clothing stores, it leaves much to be desired. You may look good at that moment, but is it worth drowning in debt and interest if you know that this is a luxury you can’t afford? Something to think about.
The second form of debt that car financing. Paying off your vehicle is an endeavour that should roughly take 6 years to pay off and in that time you are paying off the principal amount(purchase price of the car and the interest that accumulates. Before considering the level of debt you’re willing to take on, firstly assess your intentions of purchasing a car. If it is for applause, to soothe your ego or to “Keep Up With the Joneses”, you should rethink your whole decision. The instant gratification may be pleasing for a second, but when that debit order comes in every month and takes 70% of your salary, can you really afford it? We live in a culture that is extremely pleased by big and flashy lifestyles but no one drives their car around with the amount they still owe the bank on their number plate. Don’t fall into that trap.
Aligning your expenditure with your budget constraints and you’ll surely be able to pay off your car loan and insurance while simultaneously meeting all of your other long and short term obligations. Another to factor watch out for when looking at taking a car loan is the payment options. One tricky finance option is a balloon payment scheme. This warrants far fewer monthly payments and then one big “balloon” or residual payment is made at the end of your debt period. Although you may think that you’re saving by paying far less every month, the financier will use the residual value of the car after the agreed period as a trade-in that technically “forces” you to purchase another vehicle to pay off the loan. It’s an endless cycle that you may not be able to afford and one that will result in higher interest payments.
They say that ignorance is bliss but knowledge is power. If you’re one of our readers who have found themselves in a dark “debt” hole, the National Credit Act is a piece of legislation that was created to protect consumers against merciless creditors and find a way to not evade but work around all of your debt. There are many trusted debt counselling services that assist South Africans who are swamped in debt through debt rescue programmes. The debt practitioner will look at all your incomes, expenditure, assets and liabilities and then figure out how you can pay all of your creditors. Using the services of a debt practitioner will legally prohibit your creditors from repossessing any assets or taking any further legal action. Debt counsellors to consider in South Africa are the National Debt Advisors(NDA), Debt Sage, Money Clinic and Credit Rescue amongst many others.
Being financially literate also involves an understanding of debt. Debt isn’t the enemy we make it out to be, we are the only enemy that distorts the use of debt. Stay informed, do your research on payment plans and live within your means.
Author: Sthandiwe Msomi