in today’s day and age most people are confronted with some form of debt from small personal loans, to credit cards and personal accounts to mortgage bonds and hp on vehicles. however, why is it that some people seem to manage their debts more effectively than others? most often the simple answer can be traced […]
In today’s world, incurring debt is generally unavoidable for major purchases such as homes, vehicles or small business loans. The average South African citizen’s debt-to-income ratio has risen noticeably over the past decade, and the majority of people need to take out loans for vehicle and property purchases. Given comparatively high interest rates, careful personal debt management needs to be a high priority for many average consumers to avoid the lengthy, often-stressful process of debt review and payment restructuring.
The Need for Personal Debt Management
A small minority in South Africa can pay cash up front for most large-scale investments, so taking on loans is the only alternative for the average person. The good news is that plenty of resources are readily available for debt management advice. With loan interest rates gradually decreasing, sudden increases in disposable income can be a welcome result—but they can easily lead to more financial problems if spent too freely without prior planning.
Falling interest rates on mortgages can be a tempting reason for purchasing a home with a mortgage payment plan, but many buyers can find out too late they cannot truly afford the monthly payments after taxes have been applied. An initial mortgage interest rate of 1.5% for a buyer with excellent credit can increase to as much as 12% once the contract has already been signed. This is just one example of why debt management education and research are important for avoiding risks to future financial security.
Tips for Debt Management from the Professionals
Experienced financial advisors advise South African borrowers to follow a few specific debt management practices to avoid a too-large debt-to-income ratio; these tips include:
- Paying more than the monthly minimum on a loan when possible
- Negotiating with the bank to keep payments at the same amounts when interest rates change
- Setting up automatic online banking payments so that the mortgage is paid right after pay check are deposited
- Arranging to have paychecks deposited automatically into a mortgage bond account instead of a general savings account to avoid coming up short on payments with newly hiked interest rates
These proactive debt management measures will make a noticeable difference over time in the amounts of interest paid and the total term of a home loan. Some home owners have paid up their mortgages five years early and saved a substantial percentage on the total interest amount.
Debt Management in Changing Economic Climates
South African consumers who take on loans need to expect some fluctuations in interest rates due to shifting domestic and international market conditions. Growth in overall GDP and slowing rates of inflation translate into more favorable conditions for borrowers seeking home or vehicle loans with better interest rates. These same individuals still need to do their homework about the best debt management practices because rates and payment terms can change with little advance notice from one fiscal quarter to the next. .
To minimize the effect of interest rate changes due to these external factors, one method to safeguard against falling into excessive debt is to keep a minimum savings reserve amount. This sum can be in an emergency savings account or a bond account directly tied to mortgage payments automatically drawn each month. By focusing on building savings in this manner, many consumers can avoid the pitfalls and drawn-out financial troubles that come with defaults or missed loan payments. .
Taxes Advantages of Certain Debt Management Practices
South African borrowers who manage their debts successfully can take advantage of a few specific tax benefits, namely tied to retirement planning and other types of investments that accrue compound interest over a longer time period. For consumers interested in opening a bond account linked to a recurring mortgage payment, savings on interest rates are still taxable. Keeping minimum amounts marked for provisional tax payments in a bond account is advantageous because it will prevent the need for a home owner to draw from cash reserves marked for possible interest hikes. .
Earmarking funds for both tax payments and future interest rate increases are two of the best preventative debt management practices for South African borrowers. Others include paying over the minimum and keeping tabs on market fluctuations. .