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When Does Debt Interest Become Too Much?

If you’re struggling to repay debt, there may be more than the monthly instalments at fault. You could be paying too much debt interest. Reducing this debt interest is another way to make debt manageable.

Interest rates for debt

For any amount of money you borrow from the bank or credit institution, the total debt incurred comes with a specific interest rate attached to it. The calculated debt interest adds to the debt repayments throughout the loan duration, which means you will pay above and beyond the actual value of the purchased asset or initial loan.

In effect, you will pay back more than you borrowed, and the difference is meant to quantify the risk the bank or lending institution is charging you for agreeing to the loan. How much more you pay in the end depends entirely on the accrued interest.

Interest rates for debt are determined by the type of loan, secured versus unsecured debt, and the lending interest rate provided by banks or creditors, which is usually more favourable if the borrower demonstrates a good credit record and consistently positive debt repayment behaviour.

Debt interest is significantly higher for unsecured loans that do not have any asset value to guarantee the loan. Credit cards, store cards, personal loans carry more risk for the lender and this is reflected in interest rates as high as 20% to 25%, which translates into considerable debt interest repayable on top of the regular monthly instalments.

When applying for a loan, you have a better chance to receive a preferential interest rate and pay less on debt interest if:

  • You have a good credit score (above 600) or improve your credit score to minimise risk to the creditor
  • You have a healthy credit history and manageable levels of debt, paying off outstanding debt or paying instalments timely

Debt interest versus debt principal

A high level of debt negatively affects your credit risk and credit score, but it also puts a premium on the total payable debt interest. As a result, the accumulated debt interest can reach dangerous levels close to the amount borrowed in the first place, the debt principal.

According to the common law and the National Credit Act (NCA) of 2005, the borrower may not be charged more in interest than the original debt (maximum double the amount), although there are arguable instances and judgement debt cases where the borrower could be liable for further debt interest upon repeated debt defaulting (at the judgment debt interest rate). Read more about this here: https://www.news24.com/fin24/opinion/debt-can-you-be-charged-more-in-interest-than-your-original-loan-20190930

Debt interest becomes unmanageable when you’re barely able to sustain the increasing debt interest accrued to the original loan:

  • If you can only afford the minimum on monthly debt repayments on credit cards, it could mean years before paying off the full debt, while still accruing interest over the initial principal. The solution is to reach an affordable repayment rate at a reduced interest to minimise the total debt interest.
  • If you’re unlikely to repay your monthly instalments and debt interest on the initial loan, the solution is to urgently review the loan and debt repayment plan to agree on a convenient instalment that you can repay at a lower interest rate. The priority is to resume the payments and cut interest to a minimum.

Debt consolidation interest rates

The less debt you have, the easier is to manage the debt interest. Multiple similar debts at varying interest rates can be combined into one larger debt with only one monthly repayment and interest rate to service. The process, known as debt consolidation, simplifies debt management, giving you the opportunity to negotiate a more satisfactory interest rate overall. This is your chance to reduce the debt interest as much as possible.

You can either take a new loan to consolidate existing debt (not recommended if you already have plenty of loans to sort out and a bad credit record) or undergo debt review, where you consolidate debts without taking a loan.

Taking a debt consolidation loan make sense if you have a fairly good credit record, but has many risks. The new loan interest rate can be either lower or higher than the initial loan rates, depending on your creditworthiness and type of loan, secured or unsecured. A good debt consolidation interest rate should be always lower than the rate you were paying initially, but this is not always guaranteed. You may also lose your assets if you default on the secured debt consolidation loan.

Debt consolidation under debt review makes sense when you have to consolidate bad debt through a manageable repayment plan without worrying about a larger loan (that you may not even qualify to take). Since credit scores are not required to be eligible for debt review, this is good news for those with poor credit score (under 500) and generally over-indebted borrowers with a debt-to-income ratio over and above 70%.

Also, interest rates for debt consolidation are always reduced under the new repayment plan negotiated with creditors. Under debt review, debt consolidation interest rates can be reduced as low as zero, the monthly instalments are dramatically decreased, and assets are legally protected by court order.

The debt counsellor assesses your debt repayment plan and talks to creditors to reduce the amount of debt principal and interest via the new consolidated debt scheme. You will not be able to borrow money again while under debt review, meaning you can focus exclusively on eliminating debt and changing your money habits for the best.

Need help with paying off debt? Consult an ezDebt counsellor today. Our professional advisers help you stay on track with debt repayments through affordable debt counselling and debt consolidation management. All our debt counsellors are registered with the National Credit Regulator (NCR). Get in touch at www.ezdebt.co.za.

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