Ditch the debt

By Staff Writer
Nicolette Dirk, finance writer, Justmoney.co.za
The increased interest rates will mean that debt will become more expensive. While the difference may be small at the moment, any additional interest rate increases will start to really hurt your pocket. 
In 2008, 6.7 million consumers had impaired records but this has increased to 9.79 million in 2013.
According to Paul Slot, President of Debt Counsellors Association of South Africa, there are two main reasons for the deterioration of the consumers’ financial position. 
“Over many years consumers were faced with numerous uncontrollable cost increases and many consumers used debt to balance their budget. This has led to a situation where many consumers are currently unable to support their financial lifestyle and debt repayments,” said Slot.
Now is the perfect time to ditch that debt
For the last five years interest rates have been at an all-time low, meaning that the cost of debt has been reasonably low for this period of time. But, Eunice Sibiya, head of consumer education at FNB, said with the 0.5% interest rate hike, it seems that we are now entering an upward rate cycle. “This means we could see more interest rate rises in the near future.  Borrowers need to take steps to protect themselves from rate hikes because as interest rates rise, so does the cost of borrowing,” said Sibiya.
Which type of debt will be affected?
According to Sibiya any money that you have borrowed from a financial institution will go up. This includes car repayments, bond repayments as well as credit cards, personal loans, any furniture or items bought on higher purchase and store cards. 
“For example, a 0.5% increase in interest rates on basic debt of a credit card of R10 000, a store card of R10 000, car repayments on a R200 000 car and a bond of R500 000 means you could be looking at R3 600 extra a year,” said Sibiya. 
She warned that usually interest rates don’t stop at one increase. 
“The best thing to do is to start cutting down on your debt as soon as possible, so that these and any future increases don’t hit your pocket,” said Sibiya.
What is your debt is costing you?
Many people don’t even know what interest rates they are paying.  Sibiya said you should go through all of your accounts and find out which ones are attracting the highest interest rate. Usually this will be your store cards, credit cards   and personal loans.
“You will need to find out if there is space to cut down on your spending and in order to reduce your debt. Obviously the bigger items, like your car loan or your bond will be difficult to clear, so focus on the debts that have high interest first,” said Sibiya.
Experts point out that if consumers you are finding it difficult to cut down now, imagine what you will be feeling like if interest rates go up again. Then you will have even less to allocate to reducing your debt.
Sibiya said that once you have cleared a debt, not only will you be able to save a bit more, but also you won’t be hit by any future rate hikes.
“Be careful of taking on more debt, especially now. If you really need to purchase something that requires debt, add an additional 2% onto the repayments and work out if you will still be able to afford it. If you can’t, decide if you really need that purchase right now,”said Sibiya. 
Not all doom and gloom 
Sibiya added that the good thing is that, whenever interest rates go up,  interest on your savings or investments goes up too,  so start putting more money away. To read more on affordable savings accounts click here or to compare savings accounts click here.

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