Low interest rates a way out of debt trap

Experts have urged South Africans to use the historically low interest rates to clean up their finances.

“If you are struggling with your finances, you should be considering debt counselling as a way to take advantage of very low interest rates and to cut your debt burden in what is an extremely uncertain economic environment,” says Benay Sager, COO at DebtBusters.

South Africa has a system called Debt Counselling Rule Set (DCRS) that allows debt counsellors to negotiate significant interest rate reductions on consumers’ debt with creditors.

DCRS allows for a reduction in monthly fees and interest rates on all loan types.

DCRS is linked to the repo rate, the rate at which the Reserve Bank lends to commercial banks, which is currently 3.5%.

This means that debt counsellors who use DCRS are able to secure interest rates on bonds and vehicle finance as low as the repo rate plus 2% – or 5.5% – to ensure consumers are able to afford the repayments.

Personal loans sometimes have annual interest rates as high as 23%.

Store cards and credit cards also typically have comparatively high interest charges.

“In some instances, to make the repayment plan affordable for a consumer, the rates on these debts could be renegotiated down to 0%,” said Sager.

According to the National Credit Regulator, nearly 25 million South Africans were paying back debt in mid-2018.

Nearly 40% were already lagging behind in their repayments.

COVID-19 has worsened the situation for many young people who have lost their jobs or had their salaries cut.

A survey conducted by Debt Association among people with bad debt found that many are borrowing for daily necessities such as food and transport, while also cutting back on medical aid and insurance policies

Yalu CEO Tlalane Ntuli (pictured) says the economic downturn sparked by COVID-19 is likely to see South Africa experience significant job losses. Within this context, managing debt is going to be difficult for many South Africans.

“Bad debt levels are likely to increase further in 2020, in line with retrenchments,” Ntuli said.

“The national economy could easily therefore experience a cruel double blow: a slowdown in consumer spending and a fall in the number of families protected by important risk management tools like medical aid and insurance.”

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