Maintaining my Loan
Maintaining and managing your credit or debt are critical to having sound financial health. These tips and guidelines will help you to manage your accounts responsibly and avoid the pitfalls of a debt spiral.
When you sign a credit agreement and accept credit from a credit provider, you have entered into a legal contract, whereby you agree to the terms and conditions of the contract.
This means you agree to pay back the amount stated (the principal amount) within the required period and it’s charged at the given interest and costs.
You therefore agree to pay back the given monthly instalment on a fixed day every month. If you don’t, you are in breach of that contract.
This is why you need to ensure that you manage your money and debt responsibly so that you can continue to meet the terms of your contract.
Credit Health tips
Here are some ways to manage your account responsibly:
- Get your statements and check them on a regular basis, so that you can track your payments and outstanding balance.
- Pay accounts on time to avoid any default or late charges.
- Pay more than the minimum whenever possible.
- Pay via debit order and check that every payment is being made – even from the first payment!
- Always know your current balance, including uncleared amounts, so that you have enough in your account for all debit orders.
- Contact your credit providers immediately if you foresee you will not be able to afford to make your monthly payment to make an arrangement.
If you are unable to negotiate a payment arrangement with your creditor and your loan is unsecured, the creditor can seek to recover the money from you legally. If the loan is secured, the creditor can also get permission from the court to sell the security and can recover any amount still outstanding after the sale.
Before taking any court action, in terms of the NCA, a credit provider must send you a letter of demand, called a Section 129 letter, when you have been in default for 20 business days. This letter will give you 10 business days to bring the account up to date or see a debt counsellor. If you fail to do this, the credit provider can proceed with legal action.
At this point you can still try to negotiate with your creditor to come to an agreement without the matter going to court. You should try to avoid legal action as far as possible, because you might be liable for all the legal costs, including those incurred by the credit provider.
Should you not be able to stop legal action being taken, the credit provider’s first step is to send you a summons to appear in court. This will be in a magistrate’s court in your jurisdiction. The court will then place a judgement against you, and you will have to pay the total amount outstanding including all costs, and you will be listed at all credit bureaus.
If there is an attachment of goods, a sheriff of the court will visit your home with an order for the property that they are permitted to seize. This property will then be sold to pay towards the debt. If the amount is insufficient, you will still be liable for the remainder of the debt.
The steps listed below will help you gain control of your debts.
- Get a copy of your credit report.
- Draw up a debt summary table like that shown below.
- Prioritise your debts to determine which ones need to be paid off the quickest.
- Draw up your budget to determine how much you can realistically pay on each account based on what you can afford.
- Also see where you can cut down on unnecessary expenses and increase your debt repayments on certain debts to pay them off faster.
- Determine how much you can realistically pay on each account based on what you can afford, and how you have prioritised your debts.
- Communicate your intention to the creditors, in that you would like to make a new payment arrangement, and let them know how much you can currently afford to pay, and ask for an extension, a reduction or a ‘payment holiday’ on those accounts with which you are struggling to keep up.
- Keep a folder of all letters and details of phone calls (including the name of the person you communicated with) made with credit providers.
- Follow up on the arrangement you have made if your monthly payment has not been changed according to your agreement, and use the details as recorded in your file to support your request.
- Start making new payments and stay focused.
- Keep a debt progress table where you note all the payments you make and which you can cross off each month as you go along.
A debt summary table is the best way to list all your debts.
Now that you understand the process for managing your debt, and the need to contact your credit providers directly, you need to understand the most effective way of doing so.
Credit Health Tips
Contacting your credit provider
Before you phone your credit provider:
- Get all your information together before making contact.
- Have all your documentation in front of you, for example your latest statement or a copy of your credit agreement.
- Know what you want to achieve from the conversation – you completed your budget beforehand, so you know how much you can afford to pay and should offer only this amount.
- Make sure you are speaking to the right person, and make a note of the name and title of the person.
- If an arrangement is made, ask to get it in writing.
- In your negotiation, use your budget as a guide as to how much you can afford to pay, and send it to the contact person if requested.
- Discuss everything openly, tell them your difficulties honestly and try to get their support.
- Keep calm at all times.
You could also choose to send a letter to your credit provider, as shown in the example on the next page.
Making a request from your credit provider
When communicating with your credit provider, you should have a clear plan in mind for what you hope to achieve from the communication. As stated, you should be able to explain why you cannot afford your current payment, and what you can offer them. Below a number of payment-relief requests you can request from your credit pro- vider are discussed in detail.
If it is hard to pay your current payments, work out what you can afford and offer this amount. Any reduction in monthly instalments will mean that you will be paying over a longer period, so essentially you will be extending your contract period.
It may also mean that there are fees or charges incurred. When you speak to your credit providers, ask them about these fees and ask them if they might be willing to waive them, for example the monthly service fee or default fees.
You can ask for a period (usually one to three months) of not making any payments on your loan. This is also referred to as a ‘debt freeze’ or ‘payment holiday’, and this will hopefully give you the chance to catch up on other accounts that have higher interest rates first. You can also ask that interest and fees be frozen for the period as well. This is essentially putting your payments on pause.
You should only request this if you feel that your financial position will improve after the moratorium or ‘pause’ period.
Offer a lump sum
If you have perhaps saved a lump sum of money, even if it is less than the full amount, you can offer this to your credit provider in lieu of the full amount. They might accept this as full and final settlement of the debt, and you must get this agreement in writing before you pay the amount.
Remember that if your credit provider reduces payments or grants you a payment holiday, the provider will still be adding interest and service fees every month, and you should be prepared to repay the higher payments once your financial crisis has been resolved. Therefore, you should measure the consequences of any new arrangement made.
There are some important considerations you need to keep in mind when you default on your loan and you are considering the best action to take. These will now be discussed in detail.
Is the loan secured or unsecured?
A secured loan is one where you have given the credit provider the right to seize and sell specified property if you default on your loan. This is specified in the credit agreement, and they will notify you of the seizure and you will have time to either pay the outstanding amount or surrender the property. This type of loan has a higher priority because you do not want to lose your property.
If your loan is unsecured, the credit provider needs to take you to court to recover the money, or request the seizure and sale of your property. This is a secondary debt and you should only focus on these once you have made arrangements for your primary debts.
Is there insurance on the contract?
Some agreements include credit insurance. Contact your credit provider if you are not sure. It may cover your payments for a short time if you have a serious illness where you are unable to work, or become unemployed.
If you borrowed with another person, for example your spouse, you are jointly and severally liable for the debt. This means the credit provider can collect 100% of the outstanding amount from either you or the other person who signed the contract. So, this means if the other person is not able to make his/her part of the payment, you will be liable for the full amount. You therefore need to make sure your budget would cope in this event.
Consider making your payments via debit order. Some credit providers require this as a condition of the agreement. This is basically a contract between you and a third party, in this instance a credit provider, where the provider is entitled to collect a certain amount on a specified basis from your bank account.
What are the advantages of paying via debit order?
- It is convenient
- It provides a history and enables traceability of payments
- It removes your stress of having to make the payment
- It lowers the likelihood that you will skip a payment or withhold a payment
- It ensures that the payment is made on the correct day of every month
Although debit orders have their advantages, there are some things you should keep in mind:
- If a debit order is returned, perhaps owing to a lack of funds, this can cost you quite a lot in penalties (it might be as much as R130 for a returned item). Make sure you know what the bank’s penalty fee is or always ensure you have enough funds in your bank account to cover the debit order.
- Debit orders carry a cost, and different banks and service providers charge different amounts for debit orders.
There are consequences for not managing your account and making regular payments. Remember that every time you skip a payment, or pay less than the minimum instalment, this is regarded as negative credit behaviour. As you have already learnt, all credit and payment information is reported to all registered credit bureaus in South Africa on a daily, weekly or monthly basis and this negative payment information can have an impact on your future credit applications. Take steps immediately when you find yourself experiencing financial difficulties so as to avoid negative information reflecting on your credit profile.
You must understand the cost of defaulting on your credit agreements. If you had a credit card with a balance of R10 000 and an interest rate of 19% per annum, and you skipped payments for six months, you would have to pay R988.41 in interest alone over that six- month period because of the effect of compound interest.
You are also liable for default administration charges and collection costs.
- Default administration charges are those that a credit provider can charge you for advising you that your account is in arrears, and is the cost of sending you a Section 129 letter of demand.
- Collection costs are those incurred by the credit provider to collect outstanding debt from you. This will include telephone calls and legal fees.
Remember that these charges and costs are then added to your total amount outstanding and then interest is charged on that.
If you find yourself experiencing financial difficulties and are unable to meet your payments, as you have already learnt, you need to draw up a budget, get your credit report and prioritise your debts in order to determine how much you can currently afford to pay. Once you know what your situation is and have worked out what payment you can currently afford, contact your credit providers to discuss how to come to an agreement.
Once you have drawn up a budget and looked realistically at your income and expenses, and how much your monthly debt payments are, examine it carefully and realistically and determine whether reduced payments will help you. If not, it might be time for you to consider another debt-relief option, such as consulting with a debt counsellor who can assist you in achieving financial rehabilitation. Let us consider the various options:
Debt consolidation:If you choose to take one large loan that can be used to pay off your other smaller accounts, this is called debt consolidation. This means instead of a number of instalments with the associated costs, you only pay back one loan. You do need to consider what the total cost of this loan over the entire period will be, because you might be paying the loan off over a longer period than the period for which you took your original loans, and this might add up to more that you will end up paying back.
Administrationis where you get a debt administrator to arrange to pay off your debts over a longer period. The administrator will apply to the court to have some of your income set aside for basic living expenses, and the rest will be used to pay off creditors. Administration is only an option when your debts are less than R50 000. It is also usually a very costly option.
Forced sequestrationis when one or more creditors apply to the court to have the consumer sequestrated because it is in the best interests of all creditors. The court will then attach all assets and sell them to satisfy all debts. Once a debt forms part of a sequestration, creditors must accept whatever payment they get from the sale of your assets. They cannot still demand that you pay the shortfall.
Debt review or debt counsellingis a process whereby a debt counsellor helps you manage your money more effectively. This protects you against any possible legal action when a legal repayment plan is in place. The debt counsellor negotiates this repayment plan with your creditors based on what you can afford. This process is not free, and you have to pay monthly debt-review fees as well as fees for a payment distribution agent. You can find a registered debt counsellor through the NCR at www.ncr.org.za.
Managing my loan: FAQ
What does default mean?
If you are in default, it means that you have not been keeping up your regular payments and have fallen behind on the contract. The credit providers can demand payment of their money, take court action or repossess the secured goods. They may also add fees and charges for late payment. Credit providers have an obligation to inform you if you are in default, to give you a chance to catch up.