Beware your cash flow: how to manage debt

Think twice before consolidating debt.

October 7, 2015

2 minutes read

MBOMBELA – Most South Africans spend large part of their monthly income on servicing debt.

Mr Theunis Kruger, head of unsecured lending at Standard Bank, says people have to settle these before even thinking about putting food on the table. “It is a no-win situation that becomes unbearable when an unexpected expense comes along and destroys what little spending money is left over after monthly commitments are met.”

In many instances the solution is debt consolidation.

“When times are tough and budgets are stretched, people begin thinking about consolidating debt and stretching out the repayment time,” he says.

Although this may offer immediate relief, there are various things to consider before committing yourself to a longer period of debt payments, he warns. The implications of long repayment periods on personal cash flow must be fully considered.

Kruger says you could approach your bank to utilise the “credit” you have in your home loan to consolidate your debt.

This means that all your short-term loans such as credit cards, accounts, personal loans and car payments are paid off.

You then have the remaining term of payments on your home loan to use to clear the payment on the single, large debt.

However, the following needs to be clearly understood:

Consider a personal loan of R20 000 payable over 48 months at 14,25 per cent interest. The following would apply:

Monthly repayment: R549
Total payment over 48 months: R26 353
With the payment extended to 84 months at a reduced interest rate of 11,25 per cent, the following would apply:
Monthly repayment: R345
Total payment over 84 months: R28 987
Additional payment over the longer period: R2 633

Consider a larger ticket item, say a car on which there is R150 000 still owing and a term of 48 months outstanding. With a repayment period of 10 years put in place, with the additional payment going on to a home loan, at 14,25 per cent interest, the following would occur:

Monthly payment over 48 months: R4 117
Total payment over 48 months: R197 654
With the payment extended over 120 months at a reduced interest rate of 11,25 per cent, the following would apply:
Monthly repayment: R2 087
Total payment over 120 months: R250 504
Additional payment over the longer period: R52 849.

Kruger says: “These calculations are made on the basis that no settlement discounts are offered when a loan is paid off and moved from a short-term situation into a long-term cycle.

“However, it is unlikely that these discounts will offset the additional costs that are payable. If short-term debts include retail accounts such as clothing accounts, it would be unusual to even be offered a settlement discount.”

Consider these when spreading out your debt load:

Understand the repayment implications of your consolidated long-term loan
Compare interest rates across all debts that are owed
Use long-term debt solutions only when it becomes absolutely necessary
Consider paying extra into the account every month as soon as possible to reduce the loan period and save you money.

“And finally, remember to not take out any further debt until this loan is paid back, otherwise you may find yourself in the very same situation,” he concludes.