Debt management is when you actively prioritise, plan, and control your repayments on various loans, bonds, or other forms of credit. To manage your debt, you’ll always want to follow best practices and avoid taking on too many loans. Here, we’ll run through how you can take proactive steps to become debt-savvy, and what to do if you feel that you’ve borrowed too much.
Remind me, what is debt?
‘Debt’ is defined as when something, usually money is owed by one party to another party. The money that is lent is referred to as ‘credit’.
There are many different forms of debt – for example, a loan can be either secured or unsecured. A secured loan is where a borrower will lodge an asset, such as a house or vehicle, as a form of security (so that in the event they fail to repay their loan, the creditor can keep that asset to refund their expenses).e An unsecured loan, namely credit cards, personal and student loans, does not require any security at all. Secured loans usually offer lower interest rates when compared to unsecured loans for this reason.
Debt is not necessarily ‘bad’, as credit can empower you to fund emergency expenses, manage your cash flow, or pay towards getting a tertiary education when you otherwise don’t have the money on-hand to do so. However, borrowing too much at once can land you in serious financial and legal jeopardy if you aren’t able to repay your debt on time – which is why it is always important to borrow carefully and responsibly, and from a registered credit provider.
How can I get out of debt?
Getting out of debt requires patience, discipline, and the willingness to keep on track with your promised repayments. By far, the most valuable step you can take to become debt-free is to avoid relying on new credit to repay your existing loans.
To become debt-free, there are several steps you can take such as budgeting, categorising your loans, and re-evaluating your assets to see if there are items you can sell to raise additional cash to make repayments. If you’d like to read more, our 2019 guide gives you 5 great steps to follow to become debt-free.
The snowball debt reduction method
If you find that you have more outstanding debt than you’d like, but are still able to make minimum repayments on all your outstanding loans, there are several strategies that you can use to reduce your total debt.
One method is to make regular overpayments on your loans. By doing so, you might be able to reduce your total interest and fees payable over the long term, and finish repaying that loan earlier than expected.
Another method to do this is called the ‘snowball’ method, which enables you to make over-payments to repay your debt more quickly than you originally promised. If you’d like to learn more about the snowball method, you can download our easy-to-follow guide here.
What is debt review?
Debt review, also known as debt counselling, is a process where someone who is indebted, or feels that they are over-indebted, can approach a debt counsellor. A debt counsellor will review a person’s outstanding debt and will implement a structured repayment plan to ensure that all of their debts can be settled.
A debt counsellor can approach a person’s creditors, and renegotiate their interest rates by extending their repayment period. Depending on the number of outstanding loans a person has, a debt counsellor can also opt to restructure their debt. This means that instead of making multiple payments to multiple creditors, a debt counsellor can take one monthly lump sum payment, and channel each individual payment to the necessary creditor on their client’s behalf.
Much like lenders, debt counsellors and debt counselling agencies are regulated by the National Credit Regulator (NCR) under the terms of the National Credit Act (NCA).
It is worth noting that debt review is not a free facility or process.
If you choose to go under debt review, you will be charged a number of fees. These will include an application fee, an administration fee, and an aftercare fee and can optionally include attorney’s fees, NCT submission fees, and restructuring fees.
Recommended fees that debt counsellors can charge are determined in the latest Government Gazette, which can be found online here.
It is also worth noting that should you choose to go under debt review, you will be prohibited from applying for any new loans for the duration of the review period, and the review itself will be listed on your credit report and can influence your credit score.
What is debt consolidation?
Debt consolidation is the process where a debt counsellor can opt to restructure one’s multiple outstanding loans into a single loan with a new interest rate and repayment period.
This can help break down multiple repayments into one easier monthly repayment, which will usually be less than the total cost of all outstanding loans individually. However, this is due to the fact that debt consolidation or a consolidated loan usually has a far longer repayment period, and can last over several years.
How do you know when you have too much debt, and what should you do?
If you find that you have multiple outstanding loans, that you are struggling to make repayments on-time, or are borrowing more money to repay an existing loan (called revolving credit), you may have too much debt.
A good place to begin reviewing your debt is to list your outstanding loans, retail accounts, or bonds, and list their interest rates from highest to lowest. By prioritising additional repayments to your loans with the highest interest rate, you may be able to save money in the long run by reducing your total outstanding debt.
If you feel that you have too much debt to manage, it is worth contacting a licensed financial advisor to review your financial situation. They will be able to assist you in drawing up a revised monthly budget and payment strategy, or, should they see reason for it, will be able to refer you to a licensed debt counsellor.