Financial Fitness: How To Get Debt Free
By Jessie Taylor
Faced with rising interest rates and high inflation, many South Africans are seeking help to manage their growing debt burden. One of the options, which is provided by law to protect consumers, is debt counselling. This has become increasingly popular among overly indebted South Africans to help achieve financial stability.
Consumers Spend on Debt Repayments
South African consumers are spending a significant amount of their take-home pay to service debt each month, according to DebtBusters’ Q1 2023 Debt Index. “Before applying for debt counselling, on average, consumers were spending 65% of their take-home pay to service debt,” said Benay Sager, Head of DebtBusters. He added that debt counselling has proven an effective process, with the number of people successfully completing debt counselling having increased ninefold since 2016. Debt counselling is one of the debt relief measures provided for in the National Credit Act, which intends to assist over-indebted consumers struggling with debt. It offers budget advice, negotiation with credit providers for reduced payments and restructuring of debts.
Consumers struggling to meet their monthly debt obligations qualify to apply for debt counselling if they have a distributable that can be used to offer reduced payments to their credit providers. The debt counselling must be offered by a service provider registered with the National Credit Regulator, and it is a regulated, legally protected process that helps consumers gain financial stability.
Debt counselling assists consumers in repaying their debt by negotiating an affordable repayment plan agreed on by all creditors. The repayments are consolidated into one affordable repayment each month based on what you can afford. This is paid to an independent Payment Distribution Agency (PDA) overseen by the National Credit Regulator, which distributes the funds to all creditors. The PDA is usually nominated by your debt counsellor.
Clearing Debt Through Repayment
There are debt counselling fees and legal fees applicable to debt counselling, and these are built into your monthly payment. However, 90% of the payment goes directly to the creditors during the debt counselling process. Once all your accounts are settled, a reputable debt counsellor will create a clearance certificate. This, along with paid-up letters from your creditors, will be sent to all the major credit bureaus, and your debt review status will be updated. Once this has been completed, you will be eligible to access new credit.
In the first quarter of 2023 alone, consumers paid back over R406 million worth of debt to creditors as part of the debt counselling process. The Debt Index found that demand for debt counselling grew by 40% compared to the same period in 2022, while there was a massive 92% increase in subscribers for its online debt-management tools. Sager states: “As interest rates have risen, credit has become burdensome for many consumers. Average bond interest rates increased from 8.3% to 11.4% per annum in a short space of time. Average vehicle finance rates rose from 12% to 14.8% during the same period. This steep increase is pushing consumers to tap into more personal loans. Nearly everyone (96% of people) who applied for debt counselling had a personal loan. This indicates consumers are supplementing their income using unsecured credit, and personal loans have become a lifeline for many South Africans.”
How To Manage Your Debt
Preventing yourself from becoming overly indebted or reducing the amount you owe can be achieved through some careful financial planning. Consider the following tips:
Determine how much you owe:
Organising your finances will allow you to determine what amount is owed and the deadline for these repayments to prevent you from incurring unnecessary interest due to late payments.
Effective budgeting will allow you to see what income and expenses you have and identify areas in which you can save. This will give you the best indication of how much debt you can repay monthly. It’s ideal to pay off more than the minimum repayments to prevent your debt from growing.
Some debts are more expensive than others due to having a higher interest rate, such as a credit card. If you pay these off first, you will likely save in the long term. Alternatively, you can pay off the smallest debts first to free up more cash.
Consider debt management options:
These could include debt consolidation, where you take out one loan to pay off multiple smaller debts with more favourable terms. If you are struggling to pay off your debts, you may consider debt counselling.