Credix Debt Management

21/07/2020

DEBT REPAYMENT HOLIDAYS

There is a screenshot of someone’s bond statement that was widely shared on Twitter which illustrated unintended consequences of debt repayment breaks. The person had requested Nedbank for a 3 month payment break, which the bank granted. Her revised statement showed a 17 month extension to her repayment due to the break, moving her remaining period from 236 months to 253, as well as an increase in instalment.

Temporary Solution, Semi-permanent Problem

The lockdown has had victims across the board so far – from businesses to households, financial to emotional turmoil. Stats SA reported a 2% drop in GDP for the first quarter of 2020, deepening the recession the country is already in the midst of. The Finance Minister reported in the Emergency Budget of 24 June 2020 that the country is expected to contract by 7.2% in the year. Banks and other creditors therefore have little room for concession, and yet have strove to assist their clients affected by the lockdown. At 15 June, FNB reported they had offered 300,000 customers payment breaks through a 60-month repayment term, over and above their Covid-19 relief programme. ABSA offered 682,000 people customised repayment assistance, also reportedly over and above their relief measures. Nedbank had also assisted 228,000 clients. The deferments furthermore do not register as missed payments on the creditors’ credit reports. As generous as this is of the banks, it is imperative for their continued survival and client retention.

Need for Payment Breaks

All this assistance from banks has come at a cost to them. African Bank, in their interim results, reported that they set aside a Covid-19 specific provision of R550 million. With demand for new accounts falling drastically as big businesses realign and retrench, and small businesses fight for survival, the banks’ lending capacity is also affected. This is why for banks were happy to give payment breaks and yet continue capitalising interest on outstanding balances. The result in the long term was that you will repay your loans over a longer period of time on average. For most people though, this was worth it as their incomes had taken a knock during the hard lockdown.

The Covid breaks were also a relatively safe solution for banks as the qualification criteria for the loans included the requirement that one had to be in good standing. This means that the default risk after the break is limited, at the same time the compounded interest during the “break” period would further cover the risk.

Effect on Consumers of Payment Breaks

The end of the 3-month period saw instalments revert back to the original amounts. With payment breaks only affecting instalments and not interest rates, one major effect has been that the capitalised interest resulted in major increases in the cost of debt. Capitec Bank is offering to write off the interest accrued should the clients honour payments and continue to be in good standing for 12 months thereafter. Other banks, however, are capitalising the interest. In the instance of short-term loans whose repayment periods were not revised, the instalments increased where there was affordability. This is leaving a lot of people in rather precarious positions.
Another point to note is the end of the moratorium on legal action for defaults. This means that creditors have now commenced the process of summonsing for payment defaults and, in the case of secured assets, resumed repossession procedures.

Remedies

Given the uncertainty of the times with regards to retrenchments and even the viability of businesses, it is imperative to have savings pockets. These will act as a buffer, as even small savings will help consumers avoid unnecessary consumptive borrowing.

Reducing instalments to affordable amounts is another key. Most financial wellness coaches recommend a debt to income ratio below 36% as being healthy. Coupled with emergency savings and income protection insurances, this will help the consumer to reduce the shock of income reduction, retrenchment and other unforeseen circumstances.
Another key factor to look out for is the average cost of one’s debt. In these uncertain times, it will be important to reduce the cost of the debt you are carrying. One should aim to increase payment where possible to the debt with the highest levels of interest so that they get paid off first.

Proactive Assistance

At Credix, we have specialists and coaches who can give advice on savings strategies, credit report management, debt consolidation, debt restructuring and debt management. We offer free advice, and provide credit reports on assessments. Get in touch with us for a free (and obligation free) Credit Health Assessment.

23/06/2020

To Consolidate or Not


Debt consolidation involves getting a huge loan to pay off existing smaller debts. The idea behind debt consolidation is instead of making numerous payments towards your debt, you just make one payment to a single credit provider. This reduces the administration of making separate payments to many creditors, which can be overwhelming to manage and can lead to defaults. It can also make it hard to reconcile payments made to different creditors, and to track balances so that you have targeted settlement of accounts.

Another great characteristic of a consolidation loan is that your instalment becomes lower, which acts as a huge relief to most clients. A lower instalment means improved cash flow.

Convenient as it is, however, a consolidation loan is not always the best way to get out of debt. Consolidation loan repayment periods are normally long – between 60 and 120 months. This means that though you may have the convenience of reduced payments and may have resolved your over-indebtedness, the long term means the bo***ge period is prolonged. This may also impede clients who may want to purchase property or a vehicle in the medium term as their affordability is affected over a longer period (compared to not consolidating).

When the consolidation loan is granted over an extended term, the creditor has to hedge themselves from unforeseen events around the economy and the consumer’s employment situation. They do this by insuring the loans they grant against any eventuality surrounding the consumer’s employment (retrenchment, death, disability). For a long time, some credit providers were charging excessively to insure unsecured loans extended to consumers. Fortunately, the Credit Life Insurance Regulations of August 2017 has curbed the abuse of credit life insurance by credit providers. The case of Lewis Stores comes to mind, where Lewis entered a settlement deal of R67.7 million with the National Consumer Tribunal for excesses in Credit Life Insurance charges http://www.inceconnect.co.za/sens-view/11670

Interest rates are another way creditors buffer themselves from the risks of consolidating consumers’ debts. A lot of credit providers will therefore offer an interest rate as close as possible to the maximum (repo rate + 21%). What this means for the consumer is that the average cost of their debt will therefore probably increase when they consolidate. It also means that the consumer will pay more, over time, towards the loan.

Another cost to consider when getting a consolidation loan is the initiation fee. A credit provider can charge up to R1,050 as an initiation cost at the onset of an unsecured loan. Considering that the consumer would have paid initiation fees as well when taking on the original loans, it is important to consider the overall cost of consolidating the debt.

If consolidating debt repayments into one is what one is seeking, debt counselling provides this at a considerably lower cost. The average client going under debt counselling with Credix in 2019 was paying 1.8% in interest. Contrasting this to the 26.25% one may pay for a consolidation loan, the interest saving is considerable. Added to this, there are no initiation costs. Monthly charges, which creditors can charge up to R60 before VAT, also fall away when one goes under debt counselling. All these savings add up to a considerable amount, especially under the current challenging times.

Debt counselling’s major strength is the protection of the consumer through a court order stipulating the renegotiated terms. This ensures that protection from predatory lenders as long as the consumer makes continuous and correct payments.

Reckless lending audits are another plus to placing oneself under debt review. Under the National Credit Act, the debt counsellor has the authority to challenge creditors where they granted credit to consumers unlawfully. Under guidelines from the National Credit Amendment Act published on 13 March 2015, minimum standards are set which guide creditors on the granting of credit. To date, we have managed to get creditors to write off outstanding amounts in full or in part, as well as interest rate concessions on such debt.

At Credix Debt Management, we also get to assist clients by reviewing their credit life insurance. We audit their existing insurance payments and where excessive, we are able to recommend cheaper alternatives. This way, we are able to save clients considerable amounts.

Another under-rated feature of the debt counselling process is the idea of taking the client off the credit market to concentrate on debt repayment for the duration of the debt counselling period. While under debt counselling, a consumer may not make further debt. This enables the client to focus on becoming debt free, as well as to practice living on a cash budget. The idea is that this will form into habit over the duration of the debt counselling period, altering the consumer’s behaviour beyond the process. With provisions for emergencies built into the budgets, the hope is that a saving culture is also cultivated. From our success stories so far, this has been possible for a large number of our clients over the years.

Therefore despite the temporary relief in cash flow that consolidation loans may provide, one should look at the solution holistically. It is imperative that the consumer calculates all the costs associated with the consolidation loan, taking into account the duration and opportunity cost, before committing to a consolidation loan. In a lot of instances, most people are baited by the temporary relief on offer. With the right debt counsellor and correct mindset, one can get all the benefits of a consolidation loan from the debt counselling experience with a much reduced the cost burden.

21/04/2020

DEBT STRESSED? WHY YOU SHOULD NOT SHY AWAY FROM DEBT REVIEW


If you find yourself not managing to meet your credit obligations at the end of each month to the point that you feel overwhelmed by the accumulating arrears, then debt review could be a viable option for you.

Why you may ask?

Firstly, one of the major reasons why individuals fail to pay back their credit facilities is due to the interest rates imposed on these borrowed funds by the credit provider. For some debts, consumers will find at some point during the payment period they are paying more towards interest and bank charges than the actual principle debt they would have initially borrowed.

When you apply for debt review these interest rates are negotiated downwards. In our instance, we have managed to reduce the majority of our clients’ unsecured interest rates to as low as 0%, meaning whatever they pay, however small they may think it is, now goes towards paying more of the principle debt and less in interest if it even applies.

Secondly when you apply for debt review your monthly instalments are drastically reduced during the negotiation process with creditors. This enables you to have more funds available to use for living expenses after monthly debts have been paid.

The third thing is that debt review allows you to consolidate all your credit payments into one payment through an NCR registered Payment Distributing Agent (PDA) that then distributes these funds for you as a consumer to all your credit providers.

At its core debt review is a rehabilitation process. For your debt review application to be successful, an assessment has to be done to check the extent to which you are indebted. When you are found to be over-indebted, your application for debt review can thus be processed and the debt counsellor then declares to be over-indebted. As such, your information is uploaded to all the credit bureaux and you are flagged as being under debt review. This is done to prevent you from incurring further debt and enable you to pay off all your existing debt. Under debt review, the maximum term your payment plan can be restructured for your unsecured credit will be 60 Months.

Another factor is that debt review is a legal process. Once you apply for it, credit providers can no longer take legal action against you provided you pay for your debts as per the restructured payment plan.

16/03/2020

With the spread of the Corona Virus (COVID-19) in South Africa set to increase exponentially in the coming weeks and experts predicting the peak to be weeks away, a lot of businesses are going to have to shut down for a while. The China case study has shown the merits of such a shutdown https://www.nytimes.com/2020/03/13/opinion/china-response-china.html and many countries will be under pressure to follow suit in the coming weeks and months. Italy is experiencing such. The drastic measures like travel bans announced by the President on the 15th of March 2019 are therefore just a start.

Work functions that can be done remotely will enable some companies to at least keep operating at minimal capacity, but I’d imagine entire industries may be forced to shut down for a while if the pandemic persists. It will take a single employee to contract the virus for a small organisation to shut down. Lowly skilled workers will bear most of the brunt should this occur as in most cases their functions cannot be performed remotely, and HR practitioners will be altering leave and sick day policies to accommodate the scourge.

The South African economy, already in a technical recession, will take a knock from the effects of COVID-19 on its biggest trading partner, China, as well as other countries with whom trade has been suspended. The airline industry is already under pressure from consequences of the travel ban and reduced travel in general. The transporting of mail and parcels to some Asian and European countries was suspended by SAPO a week ago. However, the biggest impact for the ordinary South African will be felt by the middle class which is already under a lot of strain. This is in light of companies already struggling to pay their staff full wages due to reduced profit margins in the low growth environment.

An article in Businesstech (https://businesstech.co.za/news/finance/371694/south-africas-middle-class-has-a-massive-debt-problem/) revealed that the earnings of the middle class in the country have been eroded by as much as 20% in the last 5 years, chiefly by inflation. To subsidise as well as enhance their lifestyles, the middle class has increased their exposure to unsecured debt by up to 40%. The South African Reserve Bank’s 3rd quarter 2019 Bulletin estimated household debt to disposable income ratio at 72.6% for the 3rd quarter of 2019. The NCR’s Credit Bureau Monitor for September 2019 states that 43% of the credit active consumers are not in good standing (3 or more months in arrears, adverse listing, judgements). The strain is inescapable.

A prolonged period of business closures will most likely result in a number of companies converting the time off to unpaid leave. With the average employee already living beyond their means, the first adjustment people will make is to default on their unsecured debt. Banks will seek to shorten their collection cycle as they are also in the same low-growth, small margins environment.

The pressure on the consumer, therefore, will be exacerbated since most are surviving on debt anyway. The social strain from the virus, compounded by the inevitable drop in income and other economic pressures, will be very hard to bear.

The problems the employee will therefore face include:
1. Reduced income and cash flow
2. Lack of refinancing alternatives, mainly because of the above
3. High cost of debt
4. Resultantly, impaired records and threat of legal action from creditors

Debt counselling, with all its perceived weaknesses, will prove the best and quickest panacea. The immediate reduction of instalments to an affordable level will to an extent counter the possible drop in disposable income from company closures. At Credix, we managed to bring down interest rates for our 2019 clients from an average of 23.6% to 1.8% by effectively utilising the debt counsellors’ rules system (DCRS) to maximise the benefits. Though on average the term of the debt increases to a maximum period of 60 months, 30% of the clients we have taken on since 2016 have managed to pay off their debt within 30 months through different methods like debt sn*******ng and simply settling smaller accounts early and maintaining this trend as a discipline. The clients who have paid off their debts normally get back in the credit market, with many having been spurred by the need to purchase homes, which they were not able to do prior to debt counselling because of impaired credit records.

Debt review, therefore, frees up cash flow for capital goods.
Our assistance with client budgets enables rehabilitated clients to work with cash budgets and shun debt financing. Other less imposing solutions some overindebted people rush to provide temporary solutions. Debt review

Why did so many countries watch the epidemic unfold for weeks as though it was none of their concern?

09/03/2020

Credix Debt Management has been operating since 2016. To date, Credix is managing debt restructuring for over 5,000 clients, mainly through debt counselling.

Credix, through partnerships, also assists with holistic financial wellbeing, and assists employees working for some JSE-listed companies, as well as the big 4 banks, among others.

Contact us for a consultation.