File image: Independent UK.
CAPE TOWN - The scathing reality is that some individuals will incur penalties for settling their debt early, which forces them to maintain a substantial debt.

This comes in light of the National Credit Act which states early settlement penalties may not exceed 3 months interest on the outstanding capital value prior to settlement.

However, the early settlement penalty only applies to large debt where the outstanding value exceeds R250 000.

Just last year, South Africa’s national summons for 48 169 individual’s debt was recorded at R350 million in total, according to Statistics SA.

Chief Data Officer at Consumer credit agency, Experian SA, David Coleman, says that it is important to review the terms of your loan agreement.

“Engaging with the lender to provide notice of intention and to request a settlement quote would be highly advisable to get an indication of the potential early settlement fee impact to make an informed decision. This information can be used to compare settlement options across all debt held - aiming to settle more expensive debt (debt with higher interest rate) before settling large amounts”, says Coleman.

Meanwhile, the head of credit at First National Bank (FNB) Retail, Hannalie Crous said last year that banks are increasingly offering debt consolidations.

This is a loan which is used to pay off multiple loans. However, it is only available to ‘low-risk customers’.

Therefore, most people do not have an exit option.

Also, most individuals pile on debt to build up a good credit score. This is important when considering to buy a home or vehicle.

“A credit score is important as it reflects the likelihood of you paying credit back, and honouring your credit commitments in the future. It is a good indicator for lenders, such as banks, financial service providers and retailers, to be aware of the level of risk in lending to you. Credit scores are contained in an individual’s credit report to help lenders measure the type of credit deal to offer – or whether to decline your credit application”, says Coleman.

A credit score is determined on the following data:

- An individual’s payment history

- Current level of debt

- Types of credit accounts used

- Length of credit history

- Number of new credit inquiries over a period of time

Coleman concludes that where there are penalties for settling debt early, there are too penalties for settling debt late.

“Settling debt late would imply that the consumer missed contractual payments over the originally agreed term of the loan or credit facility. Where a facility is in arrears, the credit provider may apply additional penalties to cover the costs involved to pursue collection processes or agencies”, concludes Coleman.