When it comes to creating a debt repayment plan there are several ways to address the challenge, but the best solution will depend on your personal circumstances.
In our 2017 Money Makeover competition, two of our candidates, Howard and Monique, qualified for debt consolidation which made a significant impact to their ability to reduce their debt repayments to manageable levels. This year debt consolidation was not the ideal vehicle and our candidates, in partnership with their advisers, found innovative ways for them to pay down their debts.
Target each payment
Samke and Nkosi both felt that debt consolidation was not a necessary step as they could manage their debt repayments, it was just a matter of having a plan in place.
“Debt consolidation is not an option I would like to consider. Although it would make my monthly repayments less, it will take me longer to clear the debt,” says 26-year old Samke, who decided to rather target one debt at a time. By sticking to a strict budget to provide a bit of extra cash for debt repayment, Samke increased one repayment at a time. As one debt was paid off, she then used those installments to target the next debt. By April next year all of Samke’s debts will have been paid off. Environmental affairs officer and single mom Nkosi did not have significant short-term debt which included a relatively small personal loan and some retail card accounts. Her main financial stress comes from her property debt. Her financial adviser Funi suggested that Nkosi just target her personal loan and retail store cards as part of her new disciplined budget.
Using your mortgage to consolidate
Rather than taking out a new loan, Thuli, mother of four and head of operations at an NGO, and her husband opted to draw down on their mortgage to settle their credit card debt. This decision was not her advisers first choice, as it would mean paying credit card debt over a longer period. However, Thuli is committed to paying the additional funds she was paying into her credit card into the mortgage. The only way that debt consolidation into your mortgage makes sense is if you pay it off at the same rate you would have paid the short-term debt, but simply benefit from the lower interest rate.
If you only continue to pay the minimum mortgage installment, the danger is that you end up paying far more in interest. For example, if you take a R30 000 credit card debt and only pay the minimum mortgage repayment, you will pay it off over 20 years and it would cost a total of R70 500. By increasing the repayment on the mortgage by R2000 per month, that credit card debt would be settled within 16 months.
Speak to your creditors
Bafo was declined for debt consolidation as his debt levels were too high and his credit record was impaired as he had fallen behind on payments. Two of his largest loans were with Old Mutual Finance and the best strategy for Bafo was to speak to them about renegotiating the term of the loan. If Bafo is committed to sticking to a budget and meeting his debt obligations, Old Mutual Finance is prepared to re-negotiate the terms of his loans. By combining the two loans, lowering the interest rate and extending the term of the loan to 48 months, Old Mutual Finance could assist Bafo to reduce his total repayments from R3900 to R1232. This would give Bafo some breathing space to get his finances in order. Bafo has two smaller loans which he will be able to pay off within a few months and then he will be able to take those installments and accelerate the repayment of the Old Mutual Finance loan.
It is very important that before you start to miss payments, you speak to your creditors about a repayment plan. If you are in financial distress and prepared to adjust your lifestyle, a creditor would rather look at other options such as lower interest rates and longer terms than have you default completely.
If you have an asset or other investments, it may be worth selling those to settle some debt. Bafo is planning on taking the step of selling one of his cows in order to settle his study loan with the college. This will reduce his total debt exposure by R7000 but also free that monthly repayment to the college to accelerate his other debt repayments.
Follow six ordinary South Africans as they take up the Absa/City Press Money Makeover Challenge and undergo a money makeover boot camp. Over six months their resolve will be tested and the challenge will make them face tough decisions on every aspect of their finances. Each contestant has been allocated their own Absa financial adviser who will assist them in organising their finances and reaching their personal financial goals. The contestants will be required to complete certain financial tasks and to stick to the budgets set out for them in order to win incentive prizes or be selected as the final winner. Personal finance expert Maya Fisher-French shares their stories with you and hopefully inspire you to start your own journey.