According to the latest statistics, South Africans are no longer using loans just to pay for luxury goods and holidays. Loans are being used to survive till month-end. The reason lies in the latest statistics, which reveal that average debt levels have increased by 13% over the last four years. The average increase in income however only sits at 2%. The message is loud and clear. South Africans aren’t making more money, but are going further into debt. So what’s going wrong? When people start feeling the pressure of bad debt, one of the first solutions they think of is a loan. Banks are now offering larger loans with longer repayment periods. What people tend to forget about is the higher interest rate, which traps people in a never-ending cycle of debt repayment. While an unsecured loan (like a credit card or consolidated loan) might ease the mental burden of debt, it doesn’t address the root causes of the problem – earing less, but paying more in a failing economy.
What you need to consider before taking out a loan
1. Interest rates may go up.
On Monday, economists at Moody’s cut their 2020 growth forecast for South Africa to 0.7% from a September forecast of 1.5%, saying the economy remains stuck in low gear due to lacklustre domestic private-sector demand. A slowing economy will produce higher interest rates, which will impact loans.
2. The repayment period is longer, but you’re paying more, not less.
Paying off a loan can take anything from five to twenty years. That’s partly because many consolidation companies charge very high upfront fees and interest rates, so your total interest payable adds up to more expensive debt, causing you to pay off your loan longer, even if the monthly instalments are lower.
3. Addressing the cause of your debt.
Unorganised payments didn’t land you in bad debt. Bad financial planning did. Every household should have a monthly budget that is tracked and reviewed every single month. Free financial planning and budgeting apps like Stash, 22Seven and GoodBudget, make it easier than ever to track spending and encourage saving. Try and identify what the causes are of your over-spending, put a budget in place, track your spending and put coping mechanisms in place for when one of your “spending triggers” rears its ugly head.
4. Debt consolidation won’t necessarily reduce your debt
Debt consolidation replaces your current debt with different and even longer debt; it does not reduce your debt and is not a permanent solution for over-indebted consumers.
Before you sign on the dotted line and shackle yourself to even more long-term debt with a loan, talk to a qualified debt counsellor about your options.