Debt. It’s one of the few words that can illicit shame and dread at the same time. Over 50% of credit-active South African consumers are entirely over-indebted, according to the SA Human Rights Commission. This startling stat, released in March 2015, leaves few in doubt that we are living well
beyond our means.
But is all debt bad? No, there is such a thing as “good debt”. In fact, good debt generally involves an asset, such as a house, and is one you can comfortably pay off each month without putting strain on your budget. Sadly, there is a very small portion of the population who can feasibly do this.
The added bonus of incurring debt and paying it off on time helps grow your credit record. Without any form of debt the bank, and other financial institutions, have no way of knowing how you handle your finances. Ensuring payments are made on time and in full grows your credit record and increases your chances of attaining a loan such as a bond.
When getting into debt there are a few things we need to consider:
1. Can I pay this? We need to evaluate our entire financial situation and consider whether or not we can pay back the entire sum on time and in full. The repercussions for not doing so are late fees, greater interest and “black marks” on your credit record
2. How does this affect me? Awareness is paramount when approaching each month. There are always times we need to borrow money, whether it be via a credit card or a short-term loan, but we need to be aware of the entire picture. How much interest is being charged, the length of the loan and the fees attached to such a transaction.
3. Pay! Paying off your loans on time is the most effective way to stay clear of trouble. Over 50% of consumers are struggling to pay off their home loans. Be 100% sure you can afford any debt you enter into and that you can meet your monthly obligations without fail. With so many of us in serious amounts of debt there are ways to alleviate some of the stress.
With so many of us in serious amounts of debt there are ways to alleviate some of the stress. Debit management comes in a few guises:
Debt consolidation – where you effectively take out a loan to pay off all your debts at once and pay back one sum each month until the debt is cleared.
Debt counselling – a process you enter into with a financial institution that effectively negotiates your repayments with your creditors, reaches an agreement and fixes a monthly payment for you each month. During this time you are unable to receive any other form of credit such as a loan.
Sequestration – where your debts far exceed your assets, resulting in your assets being seized and your debt written off. This is listed on your credit record and your ability to gain more credit during that time is very difficult.
There are several others such as liquidation and bankruptcy if you were to choose to go down this route. Choosing which option suits you is entirely personal and one that should not be taken lightly.
The ramifications of any form of debt relief can be extremely dire and leave you with lasting damage to your personal credit record.
Check out more of our personal finance articles