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Industry Advice

End balance differences have long haunted the debt review industry. Consumers and Debt Counsellors expect an account to be paid up but the credit provider shows an amount owing.

PDA calculations show the account should be paid up but the credit provider insists on more money.

While this can happen due to payments dates and slight interest calculation differences there can be a hidden reason affecting some accounts:  unnoticed annual insurance increases.

Sneaky Increases

It is not uncommon for an account to have insurance built in.

This may be CLI or it may be on a bond. It is also common for prices to slowly go up or hopefully down over time.

Normally, when there will be a change to an insurance premium, the provider should let the client know. The client, in turn, should let their Debt Counsellor know if they get notification about such a change. Sometimes, however, these increases can slip in unnoticed by everyone.

This could be because of a failure to communicate by the insurer or by the consumer. Either way, the increase can throw off the Debt Counsellor’s projected repayment plan which is set out over several years. It can have very negative consequences and cause problems if this occurs.

For example, let’s say the Debt Counsellor arranges for an account to receive R1000 debt repayment each month, with the insurance portion being R100*

In this case R900 goes toward the debt (and interest portion) and R100 goes to insurance.

Then, if the insurance portion later goes up by… let’s say R50 the next year, it begins to mess with the plan.

What happens is the money that should be going towards reducing the original debt is less than expected and more funds are allocated to the increased insurance. Progressively, month by month, the gap between what you expect to happen (the original plan) and what is actually happening gets wider and wider.

And every time the bank adds a new increase or adds extra interest, that would not have been there before, the plan and reality get further and further apart.

Because this can happen on big debts, like bonds, the insurance figures for some accounts can be quite large. Thus, increases in the insurance amount, if unnoticed and not adjusted for (with increased payments by the client), can result in really big end balance differences.

What To Do About It

Now, you may want to argue with the credit provider or the insurance people about who should have notified whom and when, but it may not change the end result.

The projected payments won’t be the same as what has actually happened. This can leave consumers in debt review angry and disappointed with everyone.

It might even tip a payment that was reducing the balance over time into allowing the balance to slowly begin to increase (which is bad).

‘It might even tip a payment that was reducing the balance over time into allowing the balance to slowly begin to increase’

What many Debt Counsellors prefer to do is work with a FAIS compliant service provider who advises the clients about their insurance and maybe even change the insurance supplier to a more affordable or suitable one, with better benefits for people in debt review. These payments can then be properly allocated in the debt repayment plan and PDA payments.

Whatever your policy is, this is something to keep an eye on or sneaky annual increases can cause a lot of trouble.

 

 

*We have really fudged these figures for simplicity’s sake. You get the idea though.

Note: To read the rest of this issue of Debtfree magazine click next/previous