There is nothing complicated about debt – it’s quite simply the money you owe. But debt is not about the R20 you owe your colleague for that cup of coffee yesterday (although you should definitely pay that back) but rather the big numbers that you owe to credit providing institutions.
Although not all debt is bad, it’s important to know that even good debt can become bad if it’s not managed smartly or you cannot afford to pay it.
In this article, we will take a brief look into debt and two major categories of debt in South Africa.
The unfortunate reality is that South Africa is one of the countries with the most debt in the entire world. What’s worse is that South Africans tend not to save much either.
The most common type of debt in South Africa is found in fixed-term agreements. Fixed-term agreements include:
These debts are further divided into two major categories known as secured debt and unsecured debt.
Simply put, secured debt is debt which you have attached an asset to. Car and home loans are considered secured debt because if you stop paying them off, they will get repossessed.
Secured debt often has lower interest rates because the creditor (the person you are paying) is taking less risk. The risk for them is less because they can take back whatever it is you are paying off – or not paying off in this case.
Conversely, unsecured debt does not have an asset attached to it. Unsecured debt includes student loans, credit card debt, and store card credit.
However, just because there is no asset attached to unsecured debt, it doesn’t mean that you can skip your monthly payments. Failing to pay will count against your credit history and will make it harder to get things like home loans or bond approvals later on.
Furthermore, unsecured debt usually has higher interest rates which means that the longer you take to pay off the debt, the more you end up paying.
You can only ignore your mail (and your payments) for so long before a third party comes looking for you. Credit providers have the legal right to seek the help from debt collection agencies and attorneys should you fail to pay off your debt according to your agreement.
Debt is poisonous and if not managed properly can get you into a lot of trouble. Understanding debt, the different types of debt, and what kind of debt you can afford should be something that everyone learns about.
As part of our financial planning services, we assist all our clients to understand debt and to avoid bad debt as far as possible.
Additionally, we help people who have existing debt to develop a plan to successfully pay off debt in the most efficient way possible.
Personal financial planning is an integral part of debt management, retirement planning, short- and long-term insurance, and goal setting. Contact us to find out more.
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