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Debt Management: Is this the right time to borrow?

Debt

Debt Management: Is this the right time to borrow?

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Despite the current Covid-19 pandemic, we can not ignore the wave of debts many are trying swim out of. Unfortunately, there is not so much that most people can do when it comes to their financial position — in particular their debt cycle.

I’m constantly challenged by enquiries for advice concerning the fragility of our economy and the social reality many face. One of the vital questions is:

Should I borrow money to cover my living expenses due to this Covid-19 pandemic?

The answer is simple: Are you trying to solve a short-term problem or a long term problem? For some, being unemployed is surely a long-term problem, considering the fact that our economy is currently bleeding from loss of employment on a daily basis. Therefore, for such a person, it is clear that taking a loan will not be a viable option; there is no way in the world he will repay this loan.

For others, they are experiencing an income reduction, which seems like a short term problem. However a short term loan would still not be a remedy to such a problem. Reason being that short term loans carry very high interest rates. Therefore, due to the current junk status of our economy, the expectation is that any further credit granted by the banks or loan providers will carry high interest rates. Consequently, the repayment amounts will surely become a burden for the person borrowing money just to cover his short term debt.

What could then be the solution?

One of the important aspects is to examine your financial position during this time. It is crucial to conduct a true retrospective check up on yourself by going through all your balance sheets or bank statements. This will give you a better perspective on where you are bleeding cash and the major monthly expenses that could be adjusted. The key is to save cash by reducing your costs. The lockdown has challenged our spending behaviour as most unnecessary expenditures such as outings can not be done.

Secondly, establish strong financial discipline by taking a sound financial decision to cut down expenses and commitments from your budget. This can go as far as replacing your DSTV premium subscription to a Netflix subscription. Or redirecting your monthly outing or family contribution towards settling the small debts. Another example could be using the money you would usually spend on petrol or travelling to pay off your debts. Such a decision might be tough, but most likely will produce a stable result.

Evaluate your budget and cut down unnecessary expenses; things you can live without should completely be out of your budgets. Your appetite and focus need to be readjusted to a savvy spending habit. Consider making early arrangement with your landlord to extend the rental repayment period and pay an affordably portion, if rent is too heavy on your budget. It is important to still make a payment, if your landlord is also on a tight budget and does not approve, then work on a priority list. Things such as rent and groceries will be at the top of your list.

What if your debt is still too much?

If after going through a personal evaluation and you establish that you are in the negatives due to your debt repayments, it is important to take necessary action. You will need to approach your bank first to look at the option of a credit life cover if you are unemployed, have never missed any payments and are in good standing. Should you not qualify for such an option either because you are still receiving an income or you are not in good standing, your other option will be to contact a debt expert in order to restructure your debts and consolidate your repayments into one affordable installment. The debt counselling process can also be of great help during this time, considering the fact that your interest rates are reduced under debt counselling and you can have more funds allocated towards your major living expenses and possibly save.

Taking a loan should be the last resort. It may not be the best of options as it does not come cheap and will be very expensive and heavy on your budget in the long run.

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Rabbi Kasongo

Rabbi Kasongo works as a Qualified Senior Debt Expert at South Africa's Largest Debt Management Company. Having obtained a Honours Degree in financial management with the University of Pretoria, he has a strong passion for empowering others and providing financial advice as well as educational tools to different communities on topics related to the credit industry.

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