Being in financial debt is a common experience for most South Africans. Let’s face it, bills need to be paid, and sometimes that means relying on loans and credit cards. However, that doesn’t take away from the fact that debt should be avoided at all costs. One of the few exceptions is a house bond in which you successfully pay instalments each month.
The average debt levels in South Africa have increased by 13% in the past 4 years, according to DebtBusters. To make matters worse, it’s usually unsecured debt coupled with extremely high-interest rates. Imagine how much money you could save if you didn’t have debt.
It’s important to consider the various approaches for paying off debt and make sure you’re on the right track financially. Here are 3 common methods:
As the name suggests, the snowball method works by gradually paying off debt and building a snowball-like momentum. The process entails covering all your minimum debt payments each month and putting extra cash towards the smallest amount owed. This might sound counterproductive, as you’ll be tempted to start paying off large debts first. However, once you pay off small debts quicker, you can focus on gradually tackling the rest.
This method is a personal favourite as you start to see results early. Knocking out the smaller debts as early as possible is extremely motivating. On the other hand, some people don’t like this method as the debt with the highest interest rate is left until the end. This can be discouraging, but keep in mind that by this stage you should have gained enough momentum to pay it off.
The avalanche method means you pay off what you owe by prioritizing debts with the highest interest rates. Just like the snowball method, you cover all your minimum debt payments each month. However, any extra funds will go towards your debt with the highest interest. The goal is to pay off that debt first and minimize the amount of interest you pay overall.
This method is enticing as you start to tackle the debt with the largest interest rates first that might be making you anxious. However, it takes a long time to see substantial results. It could be years before any of your debts are fully paid off.
Debt consolidation in South Africa is usually in the form of a personal loan. The loan is taken out to pay off several smaller loans. This method of refinancing helps people who are dealing with overwhelming debt, as it allows them to combine all of their short-term debts. This includes store accounts, personal loans, and credit card debt.
The main benefit of this type of loan is owing only one creditor. However, they may charge extremely high interest rates that end up being more costly in the long run than your initial rates.
Once your debt is finally paid off, don’t get into more debt. We all know how stressful it can be to deal with the monthly payments. Additionally, you should get into the habit of saving up emergency funds to cover large expenses instead of using credit. This way, the money that would usually go towards paying off debt ends up being a lovely personal loan to yourself.