How Long To Get Out Of Debt
Do you have debt? Most people do in one form or another. It may be that money you borrowed from a family member of a student loan. it might be an over draft of some funds on a credit card. Perhaps it is a loan or vehicle finance or a bond on your home. Use of credit has become a way of life and never more so than when the economy is not doing well. Out of the millions of people in South Africa over 20 Million have made the use of other peoples money an every day affair.
So if you do have debt and are paying off those clothing accounts every month and paying funds in what feels like an endless loop, you may begin to wonder how long would it take me to get out of debt entirely? What if i stop taking on new debt and just pay off what i owe?
Different types of debt are scheduled to be repaid over different time periods
The poorest consumers often turn to pay day loans. These loans are made during the month and need to be repaid when the consumer gets their salary. The government has come out strong against this form of lending as it features high interest rates and is really a loan taken by those who are in dire financial straits. Since consumers who start to make use of such loans are struggling to make it through every month, it has become common for consumers around the world to get caught in an ever deepening trap of taking such loans monthly. Some countries have even changed their legislation to try to prevent credit providers from granting such repeat loans to consumers every month again and again.
In a lot of ways the use of overdraft facilities mimics payday loans in that consumers often get locked into always using the over draft and may find they begin to sink deeper and deeper into a negative balance each month. As they sink deeper they may ask for more and more overdraft until they hit the limit and can no longer use this facility to roll over to the following month. If the creditor sees trouble looming they may ask the consumer to begin reducing the overdraft by a few hundred rand each month over a long period of time until they are more comfortable with the risk.
Short term loans can vary in length but are often repayable over 3 or 6 months at high interest. Here the fees and charges as well as insurance costs are used to generate the majority of the profit in a short time period.
Nowadays it is possible to get very large loans that are repaid over several year (even 5 years). these loans are for big amounts. Some consumers use these loans to buy property or vehicles even though the amount is unsecured by such an asset. Some use a large loan to cover a shortfall in their contribution towards a deposit on a vehicle or a bond.
Vehicle finance can also vary in repayment term from as little as 2 years to the usual 5 years and beyond to the 7 year mark while bonds are often repaid over 20 years, 25 years or more. The usual maths with a bond is that if the consumer pays regularly and does not default they will pay 3 times the amount borrowed over time. If they buy a home for R200 000 they will repay R600 000 in total over the lifespan of the loan. If they borrow R1 Million by tt end of the day they will have repaid R3 Million roughly.
How Soon Do Creditors Want their Money Back?
Most creditors encourage you to simply pay back a minimal amount each month (unless you are behind on payments then they seem to want it all as soon as possible). You may wonder why that would be? Surely the creditor wants to get all their money back as soon as possible? While, at first ,that may seem like the most logical idea it is not the most profitable for a credit provider. To make more profit a credit provider would like to see a consumer pay their monthly fee and charges and cover the interest portion of the debt for a large number of months.
Consumers who get into trouble dealing with their debt can turn to different provisions of law to try sort the situation out and so can their creditors:
Sequestration, for example is an option that takes a consumer out of the credit market for a projected 10 years, while their debt is sorted out immediately once they apply and qualify. A consumer who can afford the process and has the funds or asset value needed to qualify can later apply to be rehabilitated a lot sooner than 10 years if they can prove they are back on their feet, as it were. This can be done after as little as 4 years.
Consumers who turn to debt review will normally repay their debt over 60 months on average. Each consumers situation is unique and each persons repayment plan will vary in length depending on their income and levels of debt. Consumers who enter the process with a vehicle will normally repay their debt over the same length as they would their car. Those with a bond will normally repay over a similar time period and leave the process once their smaller debts (like a vehicle) are paid up.
Consumers who miss payments and are sued by their creditors (when they send you a summons and take you to court) can have a judgment granted against them. This will allow the creditor to try collect their debt from the consumer for up to 30 years. If at any point you win the Lotto during that time, expect the creditors to come calling.
How Soon Can You Be Debt Free?
This really depends on you. Since most creditors normally only ask for the minimum repayment on their credit each month it is possible to speed up repayment of your debts considerably by simply repaying more than asked every month. The longer the loan is over the more difference you can make by paying extra each month. Consumers with bonds can slash years of their repayments by adding a few extra hundred rand each month to their repayments. If you want to get out of debt sooner you need to do a few things:
- Figure out exactly who you owe money to and at what rate of interest.
- Figure out how to increase your income and reduce your normal monthly spending to free up extra funds for your debt repayments each month. Avoid taking on more debt during this time.
- Pay off either your smallest debts or highest interest rate debts first. Ween yourself off the over draft and credit card.
- Pay more regularly and never miss payments.
- Sit back and watch your debts shrink over time.
By doing this you can go from a having a mountain of debt to a small hill and eventually a clear road ahead. If you find this sort of thing tricky why not pop into the office of your local Debt Counsellor with some of your figures and papers. They can help you work out a repayment plan (inside or outside of debt review and work on your monthly budget. Some charge for such a consultation (so ask up front if they charge – don’t be shy). Their excellent financial advice can help make a difference of years and could help you get a handle on your debt.