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Under Pressure: This is the one type of debt you must avoid right now at all costs

Published Jul 28, 2022


“Live within your means”, the experts advise. However, this is easier said than done for a nation that is struggling to make ends meet.

And, adds Himal Parbhoo, CEO of FNB Retail Cash Investments, you should definitely not get into any more debt.

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In fact, Parbhoo and other experts warn that doing that will throw you into a downward money trajectory.

As it is, South Africans are spending about 75% of their take-home salaries serving one or other kind of debt.

The latest interest rate hike, coupled with high petrol prices and a month of load shedding that reached stage 6 of blackouts, threw even the most resilient consumer sand small businesses off track.

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With salaries that are 80% spent in the first five days of the month, consumers are fighting to stay within their means, helped slightly by innovation in budgeting tools, the rise of online groups supporting each other in cutting back and even the old-fashioned “envelope” method.

Last week’s interest rate hike of 75bps did not only hit homeowners paying off a bond but also consumers with any form of debt.

Parbhoo says this is one of the main reasons that during times of increasing interest rates, short-term debt facilities such as credit cards, store credit cards and short-term overdrafts - should be used the least.

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Your car loan, home mortgage and student loans are all long-term obligations. However, when you've paid them down to less than a year to pay off, they also become short-term debt obligations.

Short-term loans are always normally highly expensive forms of debt, typically linked to the variable interest rate, says Parbhoo. So, when the interest rates go up, the interest in those debts also shoots up.

The best piece of advice for consumers right now with rising interest rates - expected to hit 10% by year-end - is not to increase debt levels and to live within your means, says Parhboo.

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Long-term debt facilities will have the lowest cost to consumers, and if possible, you should look to eliminate short-term debt first with further interest rate increases expected.

Parbhoo says rising interest rates mean rising borrowing costs for SA consumers, which, in turn, decreases your spending capacity.

SA companies utilising debt to conduct business are also not immune and will also incur higher operating costs as a result, and “these are typically passed onto the consumer, so you are likely to see higher cost of goods”.

“Inflation also has a negative impact on SA consumers. The increase in the fuel price is a large contributor to the rising inflation levels.

“Higher fuel costs mean higher vehicle running costs for consumers, but also means consumer goods increase in price on account of larger logistics expense.

“As a result of rising inflation and interest rates, SA consumers are ultimately going to pay more for a basket of goods,” says Parbhoo.

CONSUMER TIP: Try the "snowball method" to pay off your debt. This means you simply pay off the smallest of all your loans as quickly as possible. Once that debt is paid, you take the money you were putting toward that payment and roll it onto the next-smallest debt owed. Ideally, this process would continue until all accounts are paid off.