When you have finally succumbed to the fact that you are over your head in debt and cannot cope any further. Here is a way forward which will help to soften the blow.

Step one – Open the envelope                                                                                     No use deferring the inevitable. Debt costs more in the long run. You need to honestly assess the extent of your indebtedness. If your debt repayments exceed your affordability even after squeezing as much as possible from your current expenses then you are probably over-indebted. You shouldn’t be spending more than 30% of your monthly income on debt. The average South African household is averaging 76%.

If you cannot repay the cost of the debt you should find help quickly. The problem won’t go away by itself. You need to take charge and get something going.
Sell off property and valuables. Covert what you can into cash and pay off as much of the debt as possible.

Step two – Face your creditors                                                                             Contact your creditors and bring your situation to their attention. The lender would probably be better off compromising by extending the debt over a longer period and reducing the repayments. In some instances, arrangements can be made to service the interest only for a period. Whatever you do not apply for more credit!

Step three –  If you still cannot manage then it’s time to contact a debt counsellor. They are regulated and comply with the regulations of the National Credit Act.

The application process

Here is an outline of the process provided by a Debt Counsellor.

Step 1                                                                                                                              You Complete an application form and provide details of all your Credit Providers.(Consultations are usually done telephonically and by e-mail, but can also be done in person.)

Step 2
They determine whether you are over-indebted, in other words, do your monthly expenses exceed your monthly income? (You have to be over-indebted to qualify for Debt Review.)

Step 3
If you are over-indebted, they inform all your Credit Providers and the Credit Bureaus that you are under Debt Review. Your Credit Providers will also be requested to provide us with a Certificate of Balance (COB) in respect of your accounts.

(You will immediately start to pay a single provisional reduced monthly instalment in respect of all your Credit Providers which will be affordable to you. During the first 60 working days, legal action may not be taken against you in respect of the debts that are under review.)
Step 4
After receiving all the COBs, they will restructure your payment plan and negotiate with your Credit Providers where necessary. After negotiations with your Credit Providers, your new restructured payment plan will be sent to all your Credit Providers and this payment plan will take effect.

(Your restructured payment plan will reduce your monthly debt repayments to an affordable amount, leaving you with sufficient money for your living expenses.)
Step 5
They will instruct their specialist attorneys to apply in court in order to make your restructured payment plan a court order. You will not have to appear in court yourself, as your Debt Counsellor will be the applicant in the matter.

(The process will now be completed and you must ensure that your monthly payments are made timeously in order to prevent Credit Providers from taking action against you.)

Unsecured lending seems to be a quick and easy way out of a financial crisis but it’s probably a spade which digs a bigger hole for you. The old saying, “If you find yourself in a hole, the first thing you should do is stop digging”, is so applicable to debt.

My wife recently showed me an SMS she got on her phone offering her a personal loan without any credit referencing at an interest rate of 4,1%. This must be so enticing to someone who is desperate for cash. It offers a quick fix yet is one of the most expensive costs of lending around.

Interest rates are on the rise
The recent rate hike of another 25 basis points brings the repo rate ( the rate that is charged to the banks by the reserve bank) to 7% and the prime lending rate (the rate at which the bank lends money to us) to 10,5%. This simply means that the cost of debt is rising further digging your hole even deeper.

The cost of debt is more than you think
Now if you get offered a loan at 4,1% then there must be something more to it as it sounds too good to be true given the new rate of 10.5%.

Visiting one of many sites offering unsecured lending for blacklisted applicants I found a calculator which works out the interest over a period of 36 months. Taking an R10 000 loan over 24 months costs you R769 per month which means you pay R8 456 in interest. Over 36 months you pay R12 248 for an R10 000 loan! So you pay around 40% per annum.

Treat the cause
The main problem is that in most cases taking up this kind of loan treats the symptom and not the cause. Sooner or later you will have to deal with getting out of debt instead of further into it. At the outrageous cost of unsecured loans, your chances of getting rid of your debt make it so much more difficult.

The reality is that if you are borrowing to make ends meet you are living above your means. You will be better off finding ways to live under your means. Drastic times call for drastic measures. Even if it means scaling down on the house and or car. Borrowing at rates of 40% certainly won’t improve things.

South Africa is being reviewed this week by Moody’s rating agency which has a negative outlook on our economy. The probable downgrade to BAA3 will bring it in line with Standard and Poors and Fitch which have already downgraded us to their equivalent BBB-.

The next notch is categorised as “Non-investment grade speculative” otherwise known as “Junk” status.

Here are some links which explain the details:
http://www.tradingeconomics.com/south-africa/rating
https://en.wikipedia.org/wiki/Bond_credit_rating

What does this mean for South Africa?
Most of our national debt is raised through bonds. These debt instruments offer a fixed rate of interest for a defined period with a commitment to repaying the original capital at the end. South Africa needs to generate enough income through growth to pay its debt obligations. Servicing the cost of debt is one issue, however, the country needs to be economically sound to repay the original amount borrowed as well. The rating points to the risks of defaulting on this obligation as growth forecasts are weak placing a strain on being able to cover expenditures.

There are global investment companies which have rules that disallow them to invest in countries with a “Junk” status. So future borrowing will be even tougher for South Africa.

Following what happened to Brazil when it was downgraded to “Junk”, the cost of borrowing will increase, the currency will weaken and the Reserve Bank will continue raising interest rates.

What this means for South Africans

The probable weakening of the rand will lead to a rise in inflation as we will pay more for imports, which will lead to a rise in interest rates which will deplete our ability to save.

Research shows that it takes around 7.5 years for a country to recover from a junk status rating. This poses a gloomy outlook for us, especially as households are already on their knees struggling to make ends meet.

What can we do?
Avoid our own personal downgrade by getting tougher with ourselves. The cost of debt rises faster as interest rates hike. Forget the illusion of getting through tough times by borrowing. Instead, nail down your exposure to debt and focus on being able to afford your lifestyle. This way you will be able to cope far better if and when the storm arrives. You will also protect your creditworthiness keeping you in good standing should you need a loan in the future.