SA consumers urged to use repo rate cut to pay off debt

With the Monetary Policy Committee’s (MPC) decision to cut the repo rate one half a percent to 5% - the first cut since November 2010 - bringing interest rates to the lowest in almost 40 years, consumers should resist the urge to use this saving on unnece

This is according to Gavin Came, Chairman of the Financial Planning Committee at the Financial Intermediaries Association of Southern African (FIA), who says those consumers who find themselves burdened by debt should seek the assistance of a qualified and experienced financial planner, who can assist them in creating a financial plan and use the repo rate cut to their advantage to pay off debt and start saving towards future financial needs.

According to the Reserve Bank, the overall South African household debt to disposable income ratio stands at 74.7% for the first quarter of 2012.

“Consumers can work out their own debt to disposable income ratio by taking their total monthly contractual debt repayments (including mortgages, car repayments, personal loans, extended credit cards, etc.) and dividing it by their monthly disposable income (the money consumers take home after taxes) and multiply this number by 100 to reach a percentage. Ideally a personal debt-to-income ratio should be less than 30%. If this figure reaches between 35 to 45% they should be concerned and if it hits 50% or more, this means consumers must seek professional assistance to overcome debt,” says Came.

It is always best to try avoiding debt - especially where it is not funding a growth asset like your home - the best way to do this is through budgeting and planning, says Came. “It is vital for all consumers who do not already have a personal or family budget to start one as soon as possible or risk finding themselves in a financial predicament.”

“If you don’t have a budget or you’re not working to the one you currently have, then this needs to be addressed. If you are carrying debt, now is the time to revisit the budget and cut out anything that is dispensable. Be ruthless and remember that there is a clear difference between a ‘need’ and a ‘want’.”

“When considering which debts to pay off there are four questions consumers can ask themselves: which debts are most pressing and threatening to result in potential additional costs if not serviced immediately; which carry the highest interest rate; which do not carry any penalties or added costs for early settlement; and, which are at a stage where the settlement amount is reasonably low in relation to the regular monthly payments?”

Came says some consumers believe cutting down on insurance premiums is a good way to save, however, this is not the case. “On the short term side, this could leave you exposed to a risk that you cannot afford, while terminating life insurance policies or medical aid may result in risk exposure as well as considerable penalties, which you don’t want to incur for the sake of the longer term plan.”

He says it is important for consumers to remember that a budget has two sides: expenditure and income. “Consider the possibilities of earning a little extra income on the side - perhaps by offering a gardening service on a Saturday morning, or doing a short shift in a call centre in the evenings. Or perhaps it is just a matter of cleaning up that outside room and looking for a tenant. You’d be amazed how much even a small amount of income can contribute to overall debt repayments.”

“However, for those who are so seriously in debt that the above does not offer a feasible solution, it is critical to act now and investigate the formal debt counselling process. Ignoring the problem will not make it go away and will most likely result in a snowball effect with consumers finding themselves in even further debt,” concludes Came.