Debt consolidation is big business in the developed world, using the barometer of 'Google results'. If you search for it in the UK you get 2m entries – if you search for it in google.co.za you get only 76,000. Bond Finance expert Ian Wason looks at how you can turn 'bad' debt into 'good' debt through consolidation – if it's not too late.
Looking at the debt to income ratios of these two countries, the UK is approaching 130% and SA 70%, however the difference is a far higher percentage of debt in the UK is what is known as 'good debt' – debt which is secured on an asset such as property, as opposed to unsecured debt like credit cards and short term loans.
One of the reasons for this difference between these two countries' debt profile is that South Africa is one step behind in the credit life cycle. This is partly due to the lenders reluctance to look at consolidating clients debts, and partly due to consumers not realising the benefits.
South Africa has seen an explosion in debt over the last five years as the financial services market has opened to more of South Africa's consumers. This has been particularly acute for short-term debt as credit providers have rushed to get their credit out to the market before the introduction of the National Credit Act (NCA) on the 1st June. Consumers are now drowning in it.
Savvy financial management as preached in all corners of the globe is to move as much of your bad debt into good debt as quickly as possible. With property prices increasing, the equity in individuals' property can be used to do this. This is commonly known as debt consolidation, and it is an area in which there is going to be considerable growth in the next few years.
Bond Busters specialises in debt consolidation, and we have seen our enquiries for this double since the introduction of the NCA. The reason for this is that homeowners have always known that if they need more money, by far the best way to borrow is on their mortgage. However, because of the documentation requirements and the time taken to arrange a new mortgage they have previously opted to get a short-term loan or a credit card because it is more immediate. Since the NCA they can no longer do this, as they are already over-indebted, and now they have to look to consolidate their debt into their mortgage. By reducing their debt on credit cards from 24% to 11% on their mortgage and stretching the repayments over a 20-year period they can now prove a net surplus.
This is where the NCA has helped homeowners because most banks have done away with their previous affordability calculations of 'repayment to income' (rti), and now you can borrow up to any rti, as long as you can prove you can afford it with your net surplus income. It is rarely advisable to move short-term debt to long-term debt, but in this instance clients have no choice. We can now turn their situation from one of net deficit at the end of every month to net surplus. One of the major problems we encounter is that homeowners come to us too late, a few months ago we could have helped them, but as soon as they start missing repayments on their debt the harder it gets, so they should not delay any longer.
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