By Ian Wason, BondBusters
With higher interest rates forcing the indebted South African consumer to default on more of their debt repayments, the large lenders have issued press statements asking for clients to contact their banks first. Contrary to the opinions of some pundits, these consumers may not get such a positive response.
There has been a considerable amount of confusion in the market regarding the banks' comments and what the banks are offering to do. In these difficult times, consumers need clarity and they need to know their options.
The first issue of approaching one's lender is that it is unlikely that they will take a holistic view of your debt. Their first concern, as they have to act in their shareholders' best interests, is to get their own debt back. Once they are sure of that, they will look at what they can do to help you pay off your other debt.
Secondly, the banks are not necessarily equipped or trained to help individuals to manage their debt or explain the various options to them. For example, some credit managers still think debt consolidation is a dirty word rather than savvy financial management.
Thirdly, all banks have different criteria. Standard Bank doesn't look at debt consolidation, full stop. One bank will only consolidate debt held within its banking group (meaning that if your expensive car loan is with another lender it cannot be consolidated thus defeating the purpose). Another lender will look at consolidating your debt but they'll only consider you if your RTI (repayment to income) is under 30%, and other lenders won't even consider any form of debt consolidation.
Therefore, individuals who are concerned about their debt situation should contact a debt management firm like BondBusters so that they can explore all the options available to them. There are options available to everyone - whether they are already indebted, or whether they are just battling from month to month and think they are going to be in trouble in a few months time.
The key is to act now. Do not delay as the sooner you address your debt situation the sooner you can get out of it.
Here are some examples of possible options available to you:
1. A great deal of South Africans may benefit from debt consolidation right now - the process by which you take out a re-advance on your home loan and use that money to pay off all your other debts. This ensures that you only have one monthly payment at the lowest possible rate. While it is not always advisable to take short term debt into the long term, many people could do with more time under their current pressures.
Unfortunately however, it is not that simple a process and most people will need an independent expert to help them find their way through the nuances. By approaching all the lenders with in depth knowledge that is gained from experience, mortgage and debt consultants will work hand in hand with the consumer to find a solution that is tailor made to his/her specific situation.
To cap it all off, in the case of debt consolidation, enlisting a mortgage broker won't cost you a cent because they receive their payment from the banks. This also has the added bonus of knowing that the consultant only gets paid if you get the re-advance, so you can be sure they are doing their utmost to help you out.
2. If debt consolidation isn't an option for you, there are a number of other avenues that you could choose to explore. The NCR (National Credit Regulator) introduced debt counselling last year to offer a life line to cash strapped consumers. When you apply for debt counselling, a counsellor will evaluate your financial situation and restructure your repayments by negotiating with your creditors on your behalf. Counsellors' negotiations will bear fruit, because once under debt review, creditors know that the consumer is dedicated to paying off his debts, but purely needs more time to do so. Going under debt review is a sign to your creditors that you intend to pay off what you owe and because they know you don't intend to pull a fast one, they are significantly more interested in altering your repayments to something you can afford.
The downside here is that whilst under debt review you cannot apply for additional credit, but then again, it's the credit that got you in this situation in the first place. After you have paid off what you owe, your name is cleared and, unlike administration, you can then apply for further credit without significant hassle.
Our debt counsellors regularly see people who have left it too late to dig themselves out of a debt hole and we will always advise people to act as soon as they fear that they might be heading for debt related issues. Remember, the last thing you want to happen is for the bank to take away your house or your car.
3. A new product on the market is called debt management. By working with a debt management agency, you will be assisted in deciding which debts to pay off first so as to minimise the cost of interest etc. Each month, the consumer pays a single lump sum to the agency, who then act like a payment distributor and pay off each of the creditors in the optimum manner. This way you can be sure that your repayments are being handled in the most efficient manner and that you never miss a payment.
Each case is different and it is vital that you get expert opinion in your own current financial situation. The most important thing is to avoid phone calls from creditors and, far more importantly, to avoid repossession of your home or vehicle.