Thursday, October 17, 2013

How does Debt Review impact Business Rescue for small businesses?

A very large portion of our economic growth in South Africa rests on the shoulders of the small business owner and entrepreneur. It is this sector of the market that will drive growth in employment figures and stimulate our economy.

Finance for small businesses has always been a thorny issue for banks as such a vast number of small companies do not survive the initial start-up phase, and therefore the risk to banks is very high. These are the same small companies that might not hold assets to secure the loans, thereby reducing the risk for the financial institution. Personal surety therefore often becomes a pre-requisite to raise finance for a start-up venture. If the business is not successful, it can often leave the entrepreneur with the responsibility of repaying large loans or overdraft facilities. Huge disparity also exists in the industry currently with regards to lending criteria for financial institutions versus the criteria used by suppliers desperate to extend further credit to enhance their sales. Very seldom are suppliers’ credit lines listed on any kind of credit bureaus, and therefore it becomes increasingly difficult for financial institutions to make a true assessment of a consumer’s financial status when they have their own business or are self-employed.

Moves are afoot by the National Credit Regulator to deal with many different kinds of credit agreements which will influence the way any type of credit facility and even lease agreements are dealt with debt review. If you find yourself in a position where you cannot pay business debt, and you are concerned about the sureties you signed, talk to a debt counsellor to see what your options are.

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Wednesday, October 9, 2013

Why is Debt Counselling a winning solution for the credit industry?

Simply put, because there is no other process that works as well and involves a really simple quid pro quo; if the consumer repays every cent they have borrowed, the industry will reward the consumer not only with certain interest rate and fee concessions, but also with a clean credit record and complete financial wellness.

Let’s firstly look at it from the Credit provider’s point of view. We have all heard of toxic debt, a phrase that has become a household buzzword for the first time during the start of the economic crisis. The banking industry in South Africa finances the money it lends out in 3 ways, through depositor’s via savings and investment accounts, from money it raises from securitisation and via the Reserve Bank. It is therefore naturally not the bank’s own money that is lent out. When borrowers therefore do not repay debt, whether it be on a home loan or unsecured debt and it is on a large enough scale to have the potential to erode the returns on an investment or pension fund, it becomes toxic and effectively infects other industries like the pension fund industry in this case. By ensuring that there is enough incentive for consumers to repay debt, it therefore also protects those consumers that are investors or savers. 

From the consumer’s point of view it makes as much sense. Before the advent of the National Credit Act of 2005, there was no consumer protection legislation to assist consumers who were over-indebted. In fact, besides for weathering the impending legal action on overdue accounts one of the few solutions to reduce the amount one paid to credit each month was via a consolidation loan. This effectively took short term credit and both extended the term and increased the interest rate which has a disastrous effect on the consumer. It is not uncommon to see these consolidation loans costing the consumer as much as the initial loan. So as a consumer, expect to pay back more than you borrowed in interest and fees alone, never mind the new initiation fees and industry credit life insurance.

For the first time an alternative exists to deal with consumer financial hardship. Not only is Debt Counselling focused on getting the consumer out of debt, but also restoring financial wellness by removing late payments from the credit profile during the process. For more information you should consult a Debt Counsellor that can show you an example of what Debt Review can do for you.

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Friday, October 4, 2013

Debt Problem

Over-indebted? Struggling with your monthly expenses and bills? Cancelling Insurances to make money available for food and clothing? Borrowing money to pay debt? Missing payments? Debt Counselling or Debt Review as it is known in South Africa, is a great way to restructure your debt. With some of the concessions currently made by the banks, it is also the best way to settle your debt. In many instances banks are lowering interest rates, stripping out that administration fee and even extending the term of the loan, all in an attempt to help consumers. It is done in terms of the National Credit Act, and is the first Consumer Protection legislation the industry has seen.

Here is a good comparison. Until the advent of the National Credit Act in 2007, one of the few ways available to restructure your debt was through a consolidation loan. This in itself was a strange way to solve a debt problem, as it clearly indicates one needed to take debt at a higher interest rate to settle other debt usually at lower rates. The big problem is that in terms of the National Credit Act, credit agreements, like a consolidation loan or personal loan in many instances attract a higher interest rate than credit facilities like overdrafts and credit cards. So when people talk about consolidating their debt into one easier payment via another loan, who exactly benefits? Most certainly the lender! Often one can see that through a consolidation loan with its maximum period of 5 years, a person would end up paying back more than double the borrowed amount. Also look closely at how much the capital sum reduces after the first payment. Clearly two thirds of that first month’s payment is going straight to fees, credit life insurance and interest.
So what is the solution? Speak to a Debt Counsellor to advise you on the right solution for you. Everyone’s situation is different, and the right advice now will ensure that you have a debt free financial future with a clear credit record.

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