If you were battling to pay your debts or rent over the past few months, you may have made use of a payment holiday, which was generally granted for around three months. This grace period has ended now, so you need to start paying in full again. Yet recent research shows that many South Africans are unable to service their debt or keep up with repayments. Where does one go from here and how does one start to rebuild your financial security?
If you have used a payment holiday option on a credit agreement, check that you fully understand the implications. Interest and other costs such as insurance and fees would still have been added to your account every month. If you skipped payments for a few months, your term would be extended and your outstanding balance will be higher than before the payment holiday started.
If your landlord allowed you to use your deposit to cover your rent payments, this needs to be repaid, along with your regular monthly rent payments again. Discuss this and make sure that you and your landlord are in agreement.
If you took a payment holiday on policies or investments, check whether you actually need to actually pay back the arrears. For many investments, you would be able to just skip a certain number of payments without having to catch up. If you took a payment holiday on life cover or other risk benefits, speak to your insurer so that you understand the impacts of not paying (such as loss or reduction of cover), and if you need to reinstate the cover to its previous level before a certain date.
Tackling the mountain of 2020 debt
If your financial situation is slowly improving – perhaps your industry is back in business – you may have racked up some debt over the past few months just to get through. You now need to plan to start repaying this money; otherwise, it will just snowball and may get out of control in the future. Any debt that you incur has to be repaid at some point, so rather save on interest now and payback as much as you can as fast as you can.
Give yourself at least six months to get rid of this debt, as you need also need money to live every month. It might even take a bit longer, depending on how much debt you have.
Some steps you can take:
- Draw up a list of how much money you own, and to whom, and include everyone that you owe money to, including family if they helped you out
- Work out a repayment plan and agree on amounts to be paid back with your creditors
- If your landlord allowed you to utilize part of all of your deposit, or pay a lower rental amount, make arrangements to pay back the arrears if this is expected
- Make your debt repayments part of your monthly budget and make sure that you have enough money to live every month, as well as payback on your debts, no matter how small the repayment. If you pay too much on your debts every month, you will need to incur more debt just to get from payday to payday
- Cut out all unnecessary spending (lockdown taught us some good lessons on what is really a necessity!)
Shift your financial focus
It is very important to contribute towards an emergency fund every month, as you never know what the future will hold, but apart from that, all savings and long term investments should be stopped until you have paid back your debt. The reason for this is simple – there is no point in you paying higher interest rates on debt than the return that you are earning on your savings.
This has been a tough year and even if you went without an income for three months, this is effectively a quarter of your income lost for 2020. Give yourself the time to catch up, and once you have done so, you can then start saving for the future again. Right now, today needs to take priority.
If you really cannot afford to pay back
If you are in a position where you still cannot pay all your expenses, either because your industry is still not operating or it is taking much longer to get back on track, you can consider applying to extend the payment holiday. Some of the banks have indicated that they will consider this if the client is in good standing, in other words, the account was up to date before the Covid-19 crisis. It’s important to speak to your bank or creditor, and not to let debt orders bounce or other problems to arise. Rather be proactive and approach your creditors, and reach an agreement.
Also remember that if you were battling to pay your accounts before the Covid-19 crisis, then the payment holiday won’t really help you. You should rather look at debt consolidation or debt review perhaps, to find a more permanent solution.
Debt consolidation vs debt review
With debt consolidation, you take out one large loan and use this money to settle all your smaller debts. You then pay back only one large amount each month, but this will be less than the sum of all your smaller debt repayments each month. This is because the debt consolidation loan may either be taken out over a longer period of time or at a better interest rate.
Debt consolidation is best suited when you can afford to pay back the larger loan. It eases your cash flow and eventually, you can be debt-free if you do not incur any new debt.
Debt review allows you to tackle your debt with someone to guide and support you. Debt can be a terribly dark and lonely place, and with debt review, you have a debt counselor who restructures your debts and negotiates with your creditors on your behalf. The repayment plan becomes an order of the court which you need to abide by. You cannot incur any new debt while under debt review and the process can take up to five years to ensure that all your debt is paid off. If you really have no way to turn, and no way of paying off your debts, then debt review is a very good option to consider.
No matter what your financial situation, there are solutions to suit every need. The first step is to face up to your financial realities and then make the right decisions. If you need help, reach out to a professional debt counselor or someone in your community or church. Don’t carry the burden of financial worries alone. Any difficulty can be overcome – it just needs commitment and action.