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Avoid the debt trap – manage your loans wisely

By admin
13 May 2015

More than half of South Africa’s credit-active consumers are over indebted, according to reports from the SA Human Rights Commission earlier this year. The commission’s statistics revealed that, of the 19 million people struggling with debt, more than 11 million were unable to pay their financial obligations on time, if at all. There are several reasons for this, from personal to circumstantial, but poverty was at the top of the list.

High unemployment and slow economic growth appears to have contributed to people taking out loans they cannot afford, or overspending on their credit cards. Analysts suggest it will take a great economic, cultural and structural shift to address this difficult state of affairs, but that doesn’t mean there isn’t anything you can do to avoid a debt problem. As long as you follow a few practical and simple guidelines, you don’t have to feel alone just because you have a loan. Banks are there to help - but they need customers to be responsible.

Nitesh Patel, Head of Inclusive and Middle Markets at Standard Bank, advises: “Before you apply for a loan from any bank or financial institution, be sure you will be able to repay that money with the added interest every month without forfeiting other important financial areas, such as savings or rent. Many people fall behind in their payments because they are caught by surprise by other, more immediate expenses. Try to avoid this ‘either/or’ scenario, as this will help lighten your overall debt burden.

“If your loan application is approved, ensuring the debt is repaid according to the loan terms is critical for financial security. By using a few basic approaches, you should be able to honour your debts on time and in full, provided a regular, stable income is received.”

There are simple actions most individual customers can make a part of their debt-management philosophy to avoid falling into arrears and the debt trap when taking out the kind of loans that so often mark our important moments of life development.

The following four basic approaches to managing loan repayments are great rules of thumb:

  1. Make your loan repayment a priority

Regard your loan repayments in the same way you would view your payments for such essential things as rent, food or electricity – reducing debt should be a priority. Set aside the money for your monthly repayment before you think about spending on non-essential or luxury items – including entertainment, clothes or restaurant meals.

  1. Stay one payment ahead

As early as possible after taking out your loan, set aside enough extra cash to make an additional payment. The result is that if you happen to find yourself in some sort of financial emergency, you will not have to worry about being late with a payment.

  1. Pay extra

If you set aside a little additional money and make the occasional extra payment, you will see several benefits, such as protecting your credit record (a summary of your financial history kept by credit bureaus and analysed by financial institutions to determine whether they can trust you to repay a loan). All banks will report your credit activity to the major credit bureaus. By paying more, your loan will also end up being paid in full before the agreed settlement date, which means you will pay less on interest charges over the life of your loan. Small, regular payments really add up.

  1. Avoid late payments

If you have a number of monthly expenses, it’s easy to forget to manually repay a loan, even if you happen to have the money. Late loan repayments will end up costing you unnecessarily, because a late fee will probably be added. The best way to avoid this is to set up a monthly debit order on your bank account. By ensuring your available money is sent to your debtors automatically, you can avoid any penalty fees and easily maintain a favourable credit record – which increases your chances of not only another successful loan application later, but you’ll find yourself eligible for more money on credit and at more favourable interest rates.

“To manage your repayments wisely, it’s vital you see loans as a means to end, like a fully paid-off house or car, rather than an end in itself,” adds Mr Patel. “Avoid taking out loans for the sake of having money to burn; rather see credit as part of a structured, long-term plan that, if implemented responsibly, will help you to achieve the life you want. Remember, all the money you borrow will have to be repaid, so there’s no way you can borrow yourself out of debt.”