Are you unable or unwilling to pay your debt? Here’s how to tell if you have taken too much credit on your plate and whether you can afford it under the current repayment plan.
- You regularly miss monthly repayments.
When you take a loan to finance a purchase, the creditor grants the loan under an initial repayment plan that specifies the total amount payable with accrued interest. By accepting the loan, you commit to a monthly repayment plan until you pay off the credit amount.
The first sign you may be in trouble and unable to pay this debt is to forfeit or delay the monthly payment, hoping you’ll get back on track next month. Worse, you could miss several consecutive repayments, in which case the creditors are likely to take judgment against you (usually after three missed payments).
Bear in mind that forfeiting monthly debt repayments harms your credit record and lowers your credit score. It affects your ability to apply for future credit and receive approval from lenders and financial institutions. Remember: Small or reduced payments are better than no payments at all!
What to do: The solution is to reinstate the payments as soon as possible. Don’t delay or ignore the situation until creditors take legal action and you stand to lose assets. Talk to a debt counsellor who can negotiate a more affordable monthly repayment plan with your creditors so you can resume payments immediately.
- The debt repayments are too high.
Are you struggling to pay multiple credit cards, personal loans and other consumer debt? It may be that your monthly repayments are unreasonably high. When you have several credit lines open, monthly repayments pile on, making it more challenging to service all debts every month without fail.
A simple way to determine whether your total debt repayments are unmanageable in the current loan conditions is to look at your credit record and calculate your total repayments and debt-to-income ratio.
A high debt-to-income ratio means that your net income (salary after tax) barely covers the repayment amount, and you need to reduce debt asap. If the rate is unusually high, e.g. you spend over 70% of your income on servicing debt (over-indebtedness), you can seriously benefit from professional debt counselling.
What to do: Since paying some debt and not others is not a viable option (see above why you should not miss or delay repayments), the answer is to lower the total repayments wherever possible by negotiating a better interest rate or a loan contract extension. Debt counselling provides you with a renegotiated repayment plan to reduce the initial payable amount by up to 50% in some cases (every situation is different).
- You desperately need more cash to service debt.
Over-indebted consumers find it extremely difficult to make ends meet when creditors take a large chunk of their income first. Unsurprisingly, you may find that you always need extra cash to cover additional repayments and offload the burden. Still, you have little to no cash reserves or disposable income to do it properly.
As seen above, a high debt-to-income ratio shows the extent of your indebtedness. It is also worth considering consumer debt vs disposable income and your savings vs debt portfolio. The savings debt ratio indicates where your priorities lie. The more cash available in your budget, the more it can be directed to pay off debts faster or towards savings.
If you’re low on cash and contemplating yet another loan to fund your next purchase or pay off existing debt, it is highly probable that you barely afford to manage debt. You are overextending yourself, and the only way out is to decrease the existing debt and keep it at an adequate level, benefiting from freeing up cash to be used elsewhere.
What to do: When your salary is not enough to service debt, or your current monthly debt repayments take most of your income, rather rethink your budget and devise a step-by-step plan to cut down on debt to release money. You’ll get faster and better results with budgeting and affordable debt repayment planning through expert debt consolidation.
Need help with paying off debt? Consult an ezDebt counsellor today.
Our professional debt advisers can help you stay on track with debt repayments through quick and affordable debt counselling. All our debt counsellors are registered with the National Credit Regulator (NCR). Get in touch at www.ezdebt.co.za.