Time to batten down the hatches and deal with expensive debt as interest rates and inflation take their toll

South Africa’s annual consumer price inflation quickened to 6,5% in May, the highest since January 2017 when the rate was 6,6%. Transport and food accounted for just over half of the annual rate. In May 2021, it cost R729 to fill a 45-liter tank and R1 134 to fill a 70-liter tank with diesel. In May 2022, it cost R1 065 and R1 656 to fill the same tanks. The price of the basic food basket is also up by almost 12% compared to a year ago, sunflower oil used for cooking has increased by almost 40%, and transport by almost 16%. Interest rates are also on the rise with another three expected rate hikes this year still. This means that the cost of borrowing and servicing existing debt is also up. South Africa can expect to see incredibly constrained economic conditions throughout 2022 and increasingly financially distressed households. 

“The cumulative impact of all these factors on household income is immense, with a growing number of consumers being pushed into financial distress. One of the biggest burdens on consumer finances is ever-increasing energy costs, which have a direct impact on the price of general goods & services. Throw in the impact of load shedding, failing municipal infrastructure, depressed business confidence, and supply chain shocks - all paint a rather distressing outlook for an already ailing South African consumer,” explains Tej Desai, Chief Executive Officer of Alefbet Collections & Recoveries, a group of collections firms which includes Shapiro Shaik Defries and Associations, Metro Revenue Collect and ITC Business Administrators.    

“People are taking home less income and paying a lot more for the same goods than they were a year ago. Rising interest rates also means that their debt servicing costs are going to be a lot higher. Over-indebted consumers, especially those with a greater proportion of unsecured credit, are likely to become more indebted as their debt servicing costs shoot up, alongside living costs. The absolute clarion call right now is for indebted consumers to take a proactive and disciplined approach to paying down their higher interest-bearing debt, and to proactively engage with their credit providers if they find themselves in difficulty and unable to service their monthly debt repayments,” explains Desai.

“On the collections front, our data over the last six months shows that borrowers’ ability to pay is deteriorating. This is evidenced by a decreasing trend in both the number of payers and average monthly repayments. Simultaneously, we are seeing an uptick in call/contact avoidance, as borrowers fear the implications of being in financial distress. On this score, it’s important for consumers to know that creditors are not oblivious to the impact of the pandemic and prevailing economic conditions.  We’re seeing a shift in creditors wanting to preserve the customer relationship, moving from a posture of “when can you pay” to “how can we help you”.  Creditors are open to engaging and finding opportunities to renegotiate payment and credit terms, where there is genuine financial distress, and where borrowers have demonstrated a consistent willingness to pay.  As debt collection agents, we play an integral role in facilitating these discussions and negotiations on behalf of their credit provider,” explains Desai. 

“There is a readiness by South Africa’s credit providers to restructure debt with a more customer-centric, empathetic approach given the unprecedented circumstances we find ourselves in. Indebted consumers should use this opportunity to reach out proactively and negotiate before they default and find themselves caught up in costly and stressful legal collections process. The most important advice right now is for consumers to proactively engage and be a part of finding a workable solution with lenders that protects their financial integrity, credit worthiness, and assets,” he adds.

Alefbet Recoveries & Collections offers the following advice for consumers who may be facing debt-servicing difficulties:  

• Get on the front foot and engage proactively with your creditors if you are at any risk of defaulting on your debt repayments - don’t ignore your creditors and debt obligations!  The debt will not go away without action and missing payments combined with a lack of any response from you will see your outstanding debt role into the legal stage. The best approach is to proactively approach and negotiate with creditors and lenders upfront.If contacted by a collection agent, explain your situation so they can work with you and your credit provider to find and negotiate a solution. By being proactive and sticking to the arrangements made, you avoid the implications of having your assets attached, the stress of being legally pursued for your outstanding debt and having your credit record impaired. The important factor here is to stick to the commitments you make and if you are at any risk of defaulting on these, then contact your credit providers proactively about your situation and renegotiate the terms.   

• Prioritise your expensive debt - Debt and credit come with interest, which means you will pay more, the longer you take to pay your debt down. Rising interest rates also mean that your monthly repayments will increase as the cost of your credit goes up if linked to a variable interest rate. If you can, increase the amount you pay back each month and start with your debt that has the highest interest rate. As you pay off one debt or credit arrangement, divert the money you were already used to paying to top up your next repayment, which means you’ll be significantly reducing your term and interest charged.
  
  
• Be careful of using your home loan equity to consolidate your debt– While this may be a good strategy depending on your circumstances, there are inherent conditions and pitfalls that you need to be aware of. What you absolutely do not want to do is put your home at risk by using up all the equity in your bond to consolidate and cover your other debts, and then falling behind on your repayments. Remember that while the interest rate may be lower on a home loan, the repayment term is much longer – up to 20 years depending on how long you have had the loan. If you do the sums, you may find that while your monthly repayment is reduced, the overall interest paid on the additional debt is twice as much over the lifetime of the home loan! Remember also that if you do go the consolidation route, you need to add the monthly repayments that you were making on the consolidated debts in addition to the amount you are paying on the home loan repayment each month. If you simply continue paying your usual home loan amount only, you are essentially just deferring the other debt, paying more interest due to the longer loan period, and putting the security of your home at risk if you run into payment difficulties further down the line. Don’t go into this arrangement lightly and get professional financial advice before going this route.
  
  
• Think very carefully about debt review - While debt review can be an option for a heavily indebted consumer, it is not a process that should be entered into lightly.  It’s important to know that once you’re in debt review, you cannot obtain any new credit and you cannot exit the process until you have settled all your debts (with the provision of your Home Loan). That means that even if your circumstances change in a few months’ time and you are once again able to resume your regular payments each month, you cannot exit the debt review process until all the debt is paid off.  During the time – which can be up to 5 years - you cannot get any credit, such as loan for a car, a mortgage, a student loan and so on. Your only option would be to pay off the debt faster to shorten the period you spend in debt review. If you see no other way clear, engage with a reputable and professional debt review agency that will clearly and transparently explain all the implications of this process to you beforehand. Be aware that there are also costs attached to the debt review process which you will need to pay upfront.
  
  
• Cut discretionary spending and avoid the bad debt trap -Take a good look at your spending habits and avoid those that lead you into unnecessary and impulsive spending traps.  Budget consistently and stay on budget.  If you are in a financial bind, it’s important to cut the consumption debt traps that only get you into further bad debt - like buying groceries and impulse buys on your credit card, entertainment and eating out, gym and pay-TV subscriptions, clothing accounts and so on. It’s never pleasant, but it's important to be ruthless in prioritising what the absolute necessities are and cutting all discretionary spending until you get back on your feet and out of the red.
  
  
• Retrenched?If you are facing financial difficulties as a result of retrenchment, check whether you have credit insurance on some of your loans, retail accounts and credit cards which are there to protect you if you are retrenched and unable to service your debt. Check all your loan agreements and see whether a credit insurance policy is active – these usually are in place for the full term of the loan or credit arrangement. This insurance may cover you for up to 12 months of your debt repayments if you are retrenched, subject to the terms of the policy.
  
  
• Protect your credit score:The better your credit score, the less expensive your debt repayments will be as you’ll qualify for the best possible terms and interest rates due to your lower risk to the credit provider. The bottom line is that your credit score is a vital financial measure that can either be an enabler or hindrance, depending on how well you manage your available credit and debt repayments. It’s one of the reasons why it is so important to rather engage with a credit provider or collections agency if you find yourself unable to honour your repayments, and to rather put a new payment plan in place.  This way you prevent your outstanding debt from rolling over into the legal recoveries space, which is the point at which it can have a lasting negative impact on your credit record and score. For your long-term financial health, this is a step you want to avoid taking.