Nico van der Walt, Partner at Tandem Debt Solutions
Filling a car with petrol of diesel has been an unpleasant experience recently, as well as has the arrival of the monthly water and electricity bill. People have become noticeably glum and quiet when shopping for groceries.
Sanlam’s 42nd Benchmark Report, released in June 2024 has painted a bleak picture of the state of retirement and medical aid savings among the population. The highly respected Report found 63% of South Africans were anxious about their finances, with 87% saying they felt financial stress. For 58%, this was impacting their physical and/or mental well-being. A further 42% said they felt a sense of insecurity or lack of control over their financial future.
The introduction of the two-pot system on 1 September this year may alleviate but not solve the problem.
A number of articles appeared in the press recently suggesting that short-term loans, so-called payday loans and EWA, may be the answer.
Why this could potentially not be a benefit?
The operation of a short-term loan is that you are effectively using next month’s salary to finance this month’s normal day to day expenses. Other factors to consider would be the administration and finance costs.
The question that we need to ask is why someone needs access to end of the month wages?
Consider the following example:
Mr Overindebted
Take home pay R20,000
Expenses
Bond R6,000 (Interest 13%)
Car R3,500 (Interest 16%)
Personal Loans R2,500 (Interest 32%)
School Fees R3,000
Food and Groceries R4,000
Other R4,000
Total monthly debt repayments R12,000
Costs to maintain current standard of living R11,000
Monthly budget shortfall R3,000
Now let’s say Mr Overindebted utilises his payday loan in month 1 to the value of R3,000 to subsidise his budget shortfall. In month 2 his take home pay is R17,000 with R23,000 of expenses.
As one can see, in month 2 he will need a payday loan of R6,000 to make ends meet. The end result is self-explanatory (In month 4 the payday loan needs to be R12,000). The problem therefore gets bigger and bigger and BIGGER…… Up to a point where no more debt can be obtained to finance a budget shortfall that started at only R3,000
Now let’s consider Mr Overindebted’s other options in month 1.
Option 1
Get a new or an additional job to increase take home pay to R23,000
End result – Problem solved.
Likelihood – Very unlikely in current SA economic conditions
Option 2
Reduce cost of living by R3,000
End result – Problem solved.
Likelihood – Very difficult in current SA economic conditions with high inflation and interest rates
Option 3
Join a Government Regulated Program that has been specifically designed to help Mr Overindebted to:
- Isolate his debt problem.
- Reduce monthly debt repayments.
- Reduce monthly interest expense.
- No more budget shortfalls
- Become debt free within the next 3 to 6 years.
End results could look as follows:
Take home pay R20,000
Expenses
Bond R5,000 (Interest 12%)
Car R2,500 (Interest 12%)
Personal Loans R1,000 (Interest 5%)
School Fees R3,000
Food and Groceries R4,000
Other R4,000
Total monthly debt repayments R8,500
Costs to maintain current standard of living R11,000
Monthly budget surplus R500.
In closing
With current debt situation in South Africa more than two-thirds of employed South African are overindebted, which is very similar to Mr Overindebted situation.
The question is whether a payday loan would be in the best interests of Mr Overindebted
You be the judge…
A better solution is to use some of the monies in your savings pot after 1 September to reduce your debts with the help of a debt counsellor to negotiate:
- Favourable terms with creditors
- Protecting assets
- Reducing monthly debt repayments.
ENDS
