Weekend Argus (Saturday Edition)
Drowning in debt shouldn’t cost you an arm and a leg
Be wary of unprofessional counsellors eager to help you stay afloat, writes JASON MAST
SOUTH African debt counsellors are preparing to take on a wave of consumers who could become overindebted after the national credit downgrade to junk status, even as economists grow less concerned inflation and interest rates will rise.
Although they’ve become more optimistic as the rand has stabilised, industry experts say the downgrade’s effects may prevent South Africans already struggling with debt from making their payments. Debt counsellors are preparing for increased demand for their services, even as consumer advocates remain wary of ineffective and unethical counsellors.
“Debt counselling is an option, but debt counselling often doesn’t work,” said Nicky Campbell, a lawyer at Campbell Attorneys and author of Credit Guide, a book on the National Credit Act.
With the credit downgrade, interest rates for South African consumers could go up. Debt with fixed rates, such as most car or home loans, will stay the same, but locals with certain “unsecured loans” like credit or store cards could expect hikes they can’t afford.
People who can’t afford their minimum payments are called “over-indebted” and eligible for debt counselling, in which a state-registered counsellor negotiates with creditors on their behalf.
“I think for a lot of people that have been living very close to being over-indebted, a one percentage increase or half-a-percentage increase will probably push them into an over-indebted stage,” said Deborah Solomon, founder of the Debt Counsel Industry, an online platform for credit providers and debt counsellors.
South Africans who borrow to pay off pre-existing debt may find it harder to find cheap credit, said KPMG economist Christie Viljoen, and subsequently may be unable to afford their payments.
Credit will become scarcer at the same time inflation may spike the cost of household goods, putting greater pressure on consumers already struggling to make payments.
The rand fell from less than R12.50 to nearly R14 per dollar in the first week after President Jacob Zuma’s cabinet reshuffle. The currency is back to R13.17 per dollar as of yesterday, in part because of a weakening dollar, but economists don’t expect it tto improve greatly under R13.
“The last time we went through something like this was the run up to the cabinet reshuffle and compared to then, there’s now a lot more political risk and economic risk”, Viljoen said.
Meanwhile, Campbell expressed optimism that South Africa’s National Credit Act would shield citizens from falling into over-indebtedness, noting its provisions stopping consumers from receiving loans they can’t afford.
Similarly, economists are more bullish on the economy than they were in the wake of the downgrade, noting that interest rates may not rise as initially predicted.
But debt counsellors are already preparing to handle an influx of consumers who may be unable to meet their monthly payments.
Paul Slot, a counsellor at Octogen and president of the Debt Counsellors Association of South Africa, and Andre Misrole, the founder of the debt counselling firm Exonerate SA, said they were expecting more clients in the coming months.
Solomon said she was preparing workshops to help indebted South Africans understand their options.
The workshops will cover several paths outside of debt counselling, as counselling is only beneficial for a select group of over-indebted people – those with a bond on their house or car, according to Campbell. Counselling has also fallen out of favour among many industry experts.
“Many debt counsellors are just not professional and don’t have the training,” said Stephen Logan, a consumer advocate and co-author of the Credit Guide, noting many don’t even have the technical software to do the job.
Logan said counsellors often fail to apply a key law that caps what consumers owe – including collection costs, at double the original loan, exposing their clients to fees and rising interest rates. He said counsellors sometimes falsely promise clients a “debt holiday” during which counsellors collect fees while allowing their debt to default.
It’s important to be wary of counsellors who over-promise, Campbell said. She cited clients who’ve been taken advantage of by people online or telephonically saying they’re counsellors and promising to takeover their debt payments of R5 000 per month for less than R2 000.
Consumers should ensure that their counsellor is registered in the National Credit Regulator’s database, has a physical office, and has been working for several years, the experts said.
After meeting with a counsellor, Logan said, consumers should sign an agreement only if it will get them a significant reduction in what they owe, including counselling costs, collection fees and interest.
Experts recommend several options outside of counselling, including negotiating with the credit providers directly. Some debt counsellors will help people negotiate informally, without consumers having to enter formal debt counselling and take on the fees and restrictions it entails.
The government recently added a third option in ADR, where consumers can reach a deal with creditors through mediation.
Debt consolidation, in which someone with many debts gets a loan to cover them and then pays off that one loan, is another option. But with rising interest rates, Viljoen said a cheap loan will be hard to find.
Above all, though, with prices and interest rates increasing, experts said South Africans in debt need to draw up budgets, cut out unnecessary expenses and try to get out of debt before they need counselling – or worse, sequestration, roughly the equivalent of bankruptcy.
“We’ve been very undisciplined for many years,” Solomon said of South Africans.
“And if ever there was a time to become disciplined and learn about discipline, it’s now.”