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What to do when you’re struggling to pay loans
Talking to your credit provider before you miss a payment makes all the difference.
When you apply for a loan, both you and the credit provider need to be satisfied that you can make the payments – that your income minus your expenses every month leaves you with enough to pay the instalments. The National Credit Act (NCA) requires responsible lending, and Nedbank would never offer you a loan that you can’t afford.
But circumstances change. The rising cost of living could outstrip any rise in your income to create a financial crisis. You might experience a sudden drop in your income, perhaps after being retrenched or falling ill.
You’ll have mandatory credit life insurance on your personal loan, so, if dread disease or disability leaves you unable to work, your loan repayments will be covered according to the terms of your policy. But even though credit protection is also available for several other forms of credit, it isn’t always mandatory – if you’ve neglected to cover your credit card or car loan, for example, and illness forces you to stop working, you may have trouble making all your debt repayments.
Whatever the reason, if your budget is suddenly much tighter than before, it’s important to keep up all your loan repayments, even if that means making financial sacrifices elsewhere.
Steps to take when you’re struggling financially
- Draw up a budget, manage it closely and revise it when necessary.
- Don’t get deeper into debt. Talk to your household and get everybody’s buy-in to reduce debt. Close unnecessary accounts.
- Track your expenses by writing down every cent you spend. This will show you where your money goes and help you to see where you can save.
- Add income. Sell anything you don’t need and use your skills or hobbies to make extra cash.
- Contact your credit providers to negotiate an arrangement that will help you. For example, lower instalments over a longer period, or a consolidation loan.
- As you pay off one account, continue using that instalment amount to pay more on another debt.
- See if you can switch to cheaper insurance products.
- Draw up a list of all your debts and decide which ones you should tackle first – by paying more than the monthly instalment, you can pay it off faster.
- Ask for professional advice if you need to.
- Keep your eye on the future – sacrifices today will mean rewards tomorrow.
The loan consolidation option
Taking one loan to pay off several smaller loans is called loan consolidation. You will have one monthly payment and one set of administration fees, rather than many. It makes it easier to keep track of your payments.
Other benefits are:
- The one payment should be lower than your previous payments added together.
- Your credit profile will improve over time because fewer accounts or debts will show on it.
- You will not be listed at a credit bureau.
The downside is that you will probably pay the consolidation loan back over a longer period than the term of your original loans.
The consequences of missing a payment or paying late
Point 5 in the list above might be the most important if you’re in danger of missing a loan payment. It’s vitally important that you talk to your credit provider before you allow that to happen.
The secret to managing loans properly is to act before you have to skip a payment
Missing a payment will trigger the following consequences:
- Costs and charges are added to your balance, so you get deeper into debt.
- It shows up as negative information on your credit profile.
- You will become stressed and anxious.
- The credit provider can take legal action against you.
The collections process
When you take out a loan and sign a credit agreement, you enter into a legal contract. You agree to pay back the amount you have borrowed, as well as the specified interest and costs, within the period of time required. When you don’t pay, you are in breach of contract.
The collections process has 4 stages that get increasingly serious if you don’t make a plan to continue paying the debt.
Step 1 The credit provider contacts you by SMS, email, or phone call (or all 3) to remind you to pay, or to make an arrangement with them.
Step 2 If you don’t make a payment or a payment arrangement, the credit provider sends you a section 29 letter of demand, informing you that you are in default and asking you to pay. These letters trigger additional costs, which are added to your debt and will increase your financial stress. If you don’t pay within 10 working days, legal action will be taken against you. The letter will also tell you that you have the right to visit a debt counsellor.
Step 3 Legal action is instituted – which brings more costs. You will receive a summons to appear in court.
Step 4 You have to appear in court.
Be proactive
As a responsible borrower, you’ll want to avoid even the first step in that process, let alone the last 3. The secret to managing loans properly is to act before you have to skip a payment. Don’t wait until it’s too late. Talk to your credit providers and make a plan.
You can also apply for a consolidation loan on the Nedbank Money app.
