Before Covid-19, I had been self-employed since 2018. I had a business that needed a big cash flow, and constantly; therefore I took out loans to keep the business running and the monthly instalments were affordable for me to pay. But due to the lockdown, I lost my business and am now working as a receptionist where I get less than half of what I made working for myself. All my instalments are falling behind as I cannot afford them.
What are your thoughts? What would you suggest I do to become debt-free?
- My salary is R5 000 per month and I do not get any other income;
- I work 48km from my house; my fuel expense is R2 000 per month;
- My contribution to the house is R1 500 per month; and
- My debt totals R205 129.
What would you suggest I do to become debt-free?
In terms of reducing your debt, your options are fairly limited due to the constraints of your salary and monthly expenses. Your remaining debt is R205 129 of which R200 129 attracts interest at a rate of 23%.
The annual interest on your remaining debt is approximately R46 029.67. This amount far exceeds your annual discretionary income of R18 000 (R1 500 per month).
Unless you are able to increase your monthly income or significantly reduce your monthly expenses, you appear to be in a debt trap. Sadly, many South Africans have found themselves in similar situations due to the fallout of the global pandemic.
You may need to consider applying for debt counselling, where you can be placed under debt review. Unfortunately, this may have a negative impact on your credit score, and it could potentially make it difficult for you to secure credit in the future. However, it may give you the ability to consolidate your debts while paying a reduced monthly instalment towards your debt.
The benefits of applying for debt counselling
A debt counsellor may place you under debt review which is a legal process where you will have one monthly payment, typically of a reduced amount and potentially over a longer period of time. During this period, you have legal protection from creditors under the National Credit Regulator (NCR).
To learn more about the benefits of debt counselling, read this article.
Selecting a debt counsellor
There are a number of debt review institutions that may be able to assist you going forward.
When selecting a debt counsellor, ensure that they are registered with the National Credit Regulator (NCR). You can find a list of registered debt counsellors on the NCR’s website.
According to an article on DebtBusters titled ‘How to choose the best debt counsellor for you’, there are five points to be aware of:
- They must be well-informed and registered
- Their fees must be in line with the NCR
- They must make use of a reputable payment agency
- They must protect your information, and
- They must have a reputable industry footprint.