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Know your financial rights and obligations

26 October 2010 Paul Slot Director: Debt Counselling at Octogen

The first pay cheque tends to go to one’s head a bit, since it is generally a declaration of financial independence. However, failure to exercise financial discipline at this point can be the first step towards a spiral of debt that can lead to a trap from which it is very difficult to extricate oneself.

Before 2007, consumers had very little protection from the law against unscrupulous lenders who took advantage of widespread ignorance about drawing up budgets and the lack of healthy spending habits. Now the National Credit Act (NCA) provides a deterrent to reckless lending, but it also puts an obligation on consumers to assume greater responsibility for managing their own budgets.

“We live in a society where materialism is rife and success is indicated by the money and goods or property one can display,” Paul Slot Director: Debt Counselling at Octogen points out. “So the temptations to spend unwisely always surround us. But following certain steps can ensure one does not fall into the debt trap that ensnares literally hundreds of thousands of South Africans every year.”

The first, essential step is to establish the discipline of drawing up a budget. “Ideally, this should not be done only on a monthly basis, but for at least a few months at a time,” stresses Slot. “Of course you must be realistic in doing this. Don’t underestimate the funds you will need for essential items like travel, telephone, water and electricity because they might be ‘grudge’ payments.

“Remember too that monthly costs of some items can fluctuate quite significantly, especially entertainment costs or household expenditure, which also points to the need to draw up budgets for more than a month at a time.”

Slot believes that Octogen’s “35:25:35 budget principle” is an extremely useful guideline. “This allocates 35% of monthly income to household expenditure, 25% to financial services and 35% to debt repayments,” he explains. The extra 5% should be destined for emergency savings.

Debt is an inescapable fact of daily living, but consumers need to be responsible in entering into debt agreements. “Too many of us are blinded by what appear to be quite reasonable monthly repayments on individual items and fail to realise that adding up all the ‘reasonable payments’ can actually amount to a large figure which puts us in serious financial difficulties,” Slot continues.

However, he acknowledges that running into debt is not always just the fault of the consumer. Prior to the NCA, unscrupulous credit providers took advantage of many consumers’ poor experience of financial management, causing increasing over-indebtedness which had many negative consequences, not only financially, but also socially.

“Consumers are now better protected, but they must also play their part when applying for credit,” he stresses. “Credit providers are now required to ensure that consumers can afford the credit for which they apply. So consumers must be prepared to complete the applications honestly and comprehensively. If they provide incomplete or false information to a credit provider they might well forfeit the protection the NCA provides.”

Credit providers must explain the risks, costs and obligation of a credit agreement in simple language which the applicant can understand. “If you do not fully understand some issue, do not hesitate to ask for clarity. That is your right,” Slot emphasises. Credit providers must consider consumers’ repayment history where existing credit agreements are concerned, so consumers must provide them with full details of all debts they are currently repaying. Once again, failure to disclose all agreements can mean that the consumer will not be protected by the law.

Finally, the credit provider must assess whether the applicant will be able to meet all existing obligations as well as the new debt if credit is granted. To do this, the credit provider must take into account all income and obligations as well as possible future prospects. “Each step of this process must be fully explained by the credit provider so that the consumer has a clear understanding of all risks, costs and obligations,” Slot repeats. “It is also up to the consumer to ensure that he insists on the process, that he provides all information required and that there are no ‘grey areas’ in the explanations.”

The process has been designed to ensure that consumers do not get into debt over their heads. “A general indication that consumers are heading for the debt trap is if they are spending more than 40% to 50% of their budget on repaying debt,” Slot cautions. “This should be the first sign that they need to rein in their spending and start changing spending habits.”

For those consumers who are already over-indebted, there is still hope. “The NCA has created a network of accredited debt counsellors who can renegotiate debt commitments on behalf of consumers as well as penalise credit providers who are guilty of providing ‘reckless credit’,” Slot explains. “Consumers who are struggling to repay debt should consult an NCA-accredited debt counsellor to help rectify their financial situation, and then determine to follow the discipline of drawing up a budget and adhering to it.”

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