Sunday, 3 May 2015

How to pay off your debt faster

How to pay off debt faster

A Fin24 user asks: What is the best option to pay off my car loan faster?
Independent debt counsellors Renée Marais and Hennie Vermaas respond:
The best way to pay off your debt more quickly is to start paying more than your required monthly instalment every month. You can for example pay the contractual amount required at the usual time and later in the month when you are able to, pay in more money.
If you pay just a small amount per month more into the vehicle finance account the difference at the end will be astonishing. It has a direct effect on the interest calculated on the outstanding debt.
Another way is to have a savings account where you put away funds until you have a substantial amount and then use that to pay off some of the outstanding debt and renegotiate with the bank for a new repayment arrangement.
The creditors may baulk at this offer as it will mean less money for them and some might have conditions on the original credit agreement to this fact.
What you need to do is to read your original contract and see what conditions there are on earlier settlement of the debt.  
Food for thought
Vermaas, who has written a book to help people manage their income and expenditure, says any additional payment make a massive difference.
To illustrate the difference any additional payments can make and where consumers could possibly free up cash, Vermaas focuses on smoking and home loans.
"For my book, I used an example of expenses and asked a few questions like the items below - question and standard responses."
On expenses
Do you smoke? Yes
How many cigarettes per day? 20
Do you know what it is costing you per month?  No
Do you know what it is costing you per year?  No
Monthly cost = R 1 064.58; Yearly cost = R 12 775.00
On increased home loan instalments
Do you know that if you make additional payment on your home loan account what the impact will be over a long term?  No
Now for the real stuff.
On a home loan of R500 000 at 10.5% interest over a period of 30 years, if you make additional payments this will be the effect:
R1 per month extra = 1 instalment less to pay
R10 per month extra = 8 instalments less to pay
R100 per month extra = 4 years of instalments less to pay
R1000 per month extra = a saving of R1.2m in interest over the term of the loan and you can pay the loan in full in less than 15 years.
"Now for the funny side of it. The question/statement is simple. I am not asking you to stop smoking at all but do you realise that if you smoke 5 cigarettes less per day you can actually pay R266.15 per month extra on your home loan, i.e. 8 years of instalments shaved off the home loan repayments."

Fin24 comments:
Very good advice. It is important to remember 2 things:
1) You obtain the most savings on vehicle finance when you buy.
This means that the price you see is not the price you have to pay. South African consumers don't haggle enough and I am not talking just about second hand vehicles. Just because its a new car does not mean its the price you have to pay.
Also, don't for one minute think that because you are buying a Nissan that the same car will cost you the same at every dealership. There are massive savings to be had if you take a little time and shop around, compare quotes and make them work for the deals.
Also be careful of costs the dealer adds onto the purchase price.
Admin and licensing fees are negotiable, in fact everything in life is negotiable.
Also be careful of insurance product add ons the F and I adds to the deal once approved. They will sell you that these are compulsory but they are not. If you have life cover already you don't have to buy additional cover.
You also don't have to use the dealer to arrange short term insurance for you. Shop around and get your own.

Don't get caught up in the excitement of the buy and over spend.

Be careful of allowing the dealer to add accessories to your car, they are over priced and you can have it fitted later for a lot cheaper. Financing R20 000 less when you buy will make a big difference in the end.

2) Saving / Investing any money while you have debt is pointless. Pay off your debt before you try to save or invest any money. The interest you pay on debt is much more than the interest you earn on investment.
So use any extra money you have to settle debt.

Debt Free in 90 Days
YES its possible, even if you are under debt counselling, ask us how
Meecham, Prinsloo & Associates
Personal Debt and Insolvency Practitioners

We are not debt counsellors and we do not offer debt counselling as a solution.

Call/SMS/Whats App 0813166983
Fax 0867644392

Do you know anyone that struggles with debt? Refer them to us and we will take good care of them.
We are also able to offer you a referal commision, so talk to us and let us know who you know that needs help, just send us their email address and we will do the rest.