Consumer Right's Month a good time to start managing debt

Know good debt from bad

Not all debt is bad. Good debt means you are able to borrow money and repay it on time. This way you are able to build up a good credit record, which enables you to borrow in the future. On the other hand, bad debt means you take out a loan, but are unable to repay on time and you do not have enough money to live on. If your credit record shows that you did not pay on time, it will make it more difficult to borrow money in the future. Never borrow money to repay debt.

Shop around

Ask for a quote before you take on any debt. You have a right to this in terms of the National Credit Act (NCA). Under this Act, you are not allowed to be charged more than NCA interest rate limit on your borrowings each year. The rate is linked to the type of debt. For instance, on a home loan you cannot be charged more than 20.4% at present. In addition, if the credit provider insists that you take out credit life insurance, you can use an existing policy. You are not obliged to make use of that credit providers' credit life insurance. If you use an existing policy or obtain a competitive quote you could save money.

Be honest

Often consumers tell their bankers what they think they want to hear in order to have their loan approved. However, doing a proper budget and ensuring that you can afford the repayment terms is important if you are going to service the debt over the longer term. You are hurting no one but yourself by inflating your earnings or ability to pay back the debt. You should not be spending more than 35% of your after-tax pay on monthly debt repayments. If you rely on commission or overtime to obtain a loan, make sure this is sustainable before you borrow.

Reduce interest repayments

If you can save a bit before taking out a loan and use this as a deposit, you can greatly reduce the amount of interest that you pay on your borrowings. Over time, this can work out to be a significant amount. Also, avoid using the budget facility on your credit card as this simply extends the period over which you repay the loan - with the result that you end up paying more in interest.

Be proactive

If you have difficulty paying back the amount you have borrowed every month it should serve as a warning sign that you are running into financial difficulties. If you fail to pay back three months in a row, the lender may be able to take legal action against you - and you could be blacklisted. Talking to your bank, retailer or car dealer as soon as you think you may not be able to repay them means you may be able to renegotiate the terms of the loan until you can find a way to settle your debt. You also have the right to make use of a registered Debt Counsellor, who will help you to reschedule your debt, when you are over indebted.

Be punctual

If you are making payments on debt or accounts pay them on time. If you do not, this information is reported on your credit report and this reduces your credit rating. When you have difficulties with your repayments, it is not good to stop payments altogether. Pay what you can afford - don't stop with repayments. This will be an indication to your credit provider that you are attempting to repay the loan and this is normally accepted in good faith.

Understand loan terms

When you are in trouble with your house or car repayments, your bank will encourage you to hand back the assets voluntarily. It is important to understand this before you sign any document. Banks make use of Section 127 of the NCA, which states that you hand back the assets and authorise the bank to sell these on your behalf. What they often fail to tell you, however, is that the bank has a right to collect the difference from you irrespective of what they sold the assets for, so you could end up still paying off your debt for many years to come with nothing to show for it. The alternative to handing back assets on a voluntary basis is sell the assets yourself or to apply for debt counselling where your repayments will be rescheduled in line with your budget.

Protect assets

If you purchased a vehicle on credit, you must keep it insured. If you do not, the bank has a right to remove the vehicle on a temporary basis until you provider proof of payment. It is also good to shop around for insurance in order to get cheaper cover if possible. Make sure your home insurance is also up to date.

Rainy day fund

Create an emergency fund and plan for major expenses such as a major service for your car, replacing tyres or a school tour. As a minimum, keep an amount free on your credit card limit for emergencies.

Octogen has developed a capacity to assist individuals to understand and manage their personal finance with the aim of improving their financial health over the short and long term. To achieve this, it has developed specialised financial assessment solutions aimed at simplicity and ease of use. The solution range is normally made available to individuals via employers or groups and paid for by the employer or group on a capitation basis.