What Is Good Debt?

Good debt is a debt that will benefit your future or enable you to become financially better off further down the line. For example, a sensible investment such as a mortgage to purchase a home or as a solid investment is good debt. Mortgages are often cheaper per month than rent, and once paid off, the home is yours and you can live mortgage/rent-free. Additionally, when purchased as an investment, you can even make money by selling the property further down the line.

Student loans are also considered good debt. Graduates have far better job prospects and a higher likelihood of earning a bigger salary. The same goes for investing in other kinds of further education or training courses.

If you run or own your own business, investing in it so that it can grow would be considered good debt too. If you have a solid business plan and put in the hard work needed for it to become a success, your business could eventually be worth a lot more money than the loan you originally took out to expand it.

What Is Bad Debt?

In contrast to those good debts, bad debt is one that drains your resources in repayments, will not “pay for itself” in the future and does not benefit your professional development. Bad debt may even put you in a position whereby you cannot afford your usual lifestyle or default on usual bills due to the unaffordable repayments.

Debt is usually considered to be “bad debt” when it is unaffordable to the individual. Many unnecessary items — such as cars or luxury holidays — are also considered bad debt because they either depreciate in value immediately or hold no value at all. However, the kind of debt that is considered a real “no-no” is borrowing money to repay debt, unless you consolidate your debts and no longer spend on the lines of credit you have cleared. If you are struggling to reach the end of every month and have tried budgeting to no avail, take a look at our information on Debt Review or contact us for more information.

How Much Is Too Much Debt?

A great way of keeping an eye on your finances, and whether you should apply for that credit purchase or save up for it the old fashioned way, is to work out your debt-to-income ratio (DTI).

A debt-to-income ratio (DTI) is one of the many factors that lenders look at when making a decision on your lending criteria. But it’s not just lenders that should be interested in this. Your DTI will help you to monitor your income and expenses, get a better understanding of where you may need to cut back and where you may have some flexibility!

How to Work Out Your Debt-to-Income Ratio (DTI)

1. Add up all of your monthly debt payments. This should include mortgage payments, loans, store credit, student loans, credit cards and any other form of debt. It may be a good idea to add an estimated payment amount for a loan you are considering to this total. This way, you will get a true reflection of your DTI after this new debt is added.
2. Now add up your total income. Include your gross monthly income, any child benefit and anything earned through freelancing.
3. Divide your monthly debt by your monthly income and multiply by 100. The result is your DTI as a percentage

Income ÷ Debt x 100 = DTI

Debt in South Africa

An April 2020 report from TransUnion provides context as to how much South Africans owe on outstanding loans.

The report shows that:

• The average South African owes R19,265 on their credit card account, while the average credit line (the amount of credit a person may borrow from) is R32,973.
• The average outstanding amount on home loans is  R514,938.
• The average outstanding amount in vehicle financing loans is R187,193.
• The average outstanding amount on personal loans is R36,835.

If you are concerned about your level of debt and your ability to keep up with your repayments, don’t hesitate to contact National Debt Support today to chat with one of our friendly advisors, who will assess your situation and give professional, non-biased guidance.

How to Manage Debt

Sometimes, managing debt can be easier said than done. There may have been some unforeseen circumstances such as a job loss or a relationship breakdown, or you may have had to borrow more money than you intended due to an unexpected expense.

Take a look at our budgeting ideas to get top tips for managing your money to get yourself back on track. If you would like further information or guidance, request a free callback to speak with one of our expert guides today.

How to Get Out of Debt

If Debt has become a problem and it has gotten to the point that you are missing payments or being chased by debt collection agencies, contact National Debt Support today. Our friendly expert guides will help you to understand your options when it comes to managing your debt and whether you could benefit from Debt Review. So call today and begin your journey to financial freedom

Here at National Debt Support, we understand that debt is difficult to deal with both financially and emotionally. It can sometimes feel like an isolating experience you want to keep secret, but it is essential to remember that nothing is embarrassing about financial difficulties. At National Debt Support, we understand that bad debt happens to good people, and that is where our expert advice and professional services can help lighten your burden.

As we start to see the beginning of the end of the coronavirus pandemic, now is the time to regain control of your financial future and follow our 6 tips for getting out of debt.

1. Write down Your Debts and Prioritise Them

The first step to tackling your debts is to make a note of all the money you currently owe. This can seem like a daunting task but believe us, facing your responsibilities head-on is the only way out of financial difficulties. It is also essential to write down all the money you currently owe so that you can keep track of it all and not miss your repayment periods.

Prioritise debts that need to be paid back first, once you have a record of them,  work out which ones you have a little more wiggle room with.

Prioritising your debts doesn’t just mean paying back the largest amounts first. Instead, make sure that you keep up to date with important payments like your rent, mortgage or utility bills to ensure that you continue to have a roof over your head, water and electricity.

Next, you should pay off the debts with the highest interest rates to not pay back way more than you have to.

2. Make a Budget or Spending Plan

It is important to know exactly how much money you have coming in and how much is going out. It is usually due to poor budgeting that many people find themselves in debt in the first place.

Once you understand your finances, you can start making a budget or a spending plan. Look at your income and try to find ways to limit your spending. Is it possible to cut down on your phone bills or morning coffees? If so, this is a great place to start. After that, you can look around for cheaper alternatives to the services you already use. Many of us don’t even realise that we are paying more for our utilities or television plans than we need to be.

Developing a smarter spending plan will leave you with more cash in your pocket at the end of the month.

3. Look for Extra Income

If you find that your regular income doesn’t cover your outgoings, it might be an excellent time to explore the option of gaining an extra income.

You can do this in a couple of different ways. First of all, you can look to work more hours or pick up another job on the weekends. This could be a huge help for many people when getting out of debt, even if it is just a short term solution that could stop you from paying large amounts of interest.

4. Take Care of Your Mental Health

Although it may not be a tip for getting out of debt, it is of the utmost importance to remember to look after your mental health and emotional well-being if you’re suffering financial difficulties.

It is common for people to feel a considerable amount of shame and isolation due to debt stress. Debt, however, is not something to feel embarrassed about. Make sure you get professional medical help if you find it too much to cope with, and continue making healthy choices, such as meeting up with friends and family and maintaining your exercise routine. Only when you are in a good place mentally will you be successful in getting out of debt.

5. Get Professional Help

It is always okay to ask for help. However, getting out of debt can be complex and sometimes, professional experience is required. National Debt Support can offer expertise, debt guidance and solutions to help you take back control of your financial future.

6. Consider Your Debt Solutions

Debt Review

Debt Review is a government legislated process that forms part of the National Credit Act 34 of 2005 (NCA) which was created to help and protect people who are struggling to meet their monthly debt repayments.

Under Debt Review, your debt counsellor will formulate a new affordable monthly repayment plan by taking into account all of your income and expenses. Your debt counsellor will then negotiate with your creditors to reduce your monthly repayments (in some cases by up to 50%). Your debt counsellor will aim to ensure that your interest rates, as well as your monthly repayments are reduced, helping you pay back your creditors and become financially free within a period of 60 months or less.

Debt Review enables you to manage your costs of living and regain your financial freedom. Read our blog explaining all of the benefits of Debt Review.

If you are struggling to pay your debts, National Debt Support is here to help you manage your debt. Request a free call back today and learn how to manage your money better.

What’s the difference between “good debt” and “bad debt”?

Good debt is debt that is used to enhance your wealth. You may take out a loan to purchase something that will boost your monthly income, or its value may increase over time, allowing you to make a profit if you sell the item in the future. In addition to this, good debt may be viewed as a loan used to acquire something that has a productive value, such as buying a car to travel to work and supporting your family.

Bad debt, then, is the opposite of this. Bad debt is debt used to purchase something that will not enhance your income, will not grow in value over time, and has little to no productive value.

Sometimes, it’s not always crystal clear. What bad debt is for some may be good debt for others. For example, buying a gaming console and some video games on a store card would be bad debt.

But if that same retailer bought a large number of consoles and games from a warehouse on credit to sell in the shop, that would be good debt. Why? Because the retailer will likely make a profit on those items, allowing them to clear their debt with profit left over.

This is the essence of good debt: it is debt used to generate future returns. Other forms of good debt may include a mortgage to buy a house; a loan to start or invest in a business; money used to invest in commodities or financial assets; and money lent to businesses for an agreed interest rate, such as peer-to-peer lending. All these types of investing carry significant risks.

An important point to note is that it is only considered good debt if the growth in value or income from your asset outweighs the cost of your loan — if it does not, then it is bad debt because the cost of your loan will be more than what you are making from your investment.

What Is Problem Debt?

Problem debt is when your monthly income struggles to meet your monthly outgoings. No matter how much we earn, whether it is R1,000 per week or R5,000 per week, there will always come the point when debt becomes a problem.

If you find that a large part of your income goes straight back out to pay off your recurring debt, this is problem debt. The best solution is to pay this down as quickly as possible. The issue with problem debt is that it can quickly spiral out of control — it may only take a one-week holiday and a few missed payments for your debt to become unmanageable.

Your debt can also be considered a problem if it impacts your well-being. Debt can affect us all differently; some of us can feel comfortable owing quite large amounts, others can feel stressed and worried over the smallest amount. Therefore it is important to consider how you respond to debt.

If debt makes you feel stressed and worried, then clearing your debts may be the best option to take that worry off your mind. If you are comfortable with debts, you will also need to be very cautious because you may allow yourself to take on too much of a burden.

How Do You Deal With Debt Problems?

One of the best ways to start resolving debt problems is to begin tracking your monthly financial inflows and outflows. It is easy to lose track of what you are spending, leaving you with the impression that you have not overspent. This could be a justification for purchasing that dress or that new phone on your credit card — but if you were aware of precisely how much you had spent, you might think twice.

This is why tracking our finances is so helpful. It puts us in control, like a business finance manager, allowing us to scrutinise every expense. Instead of basing your spending on a whim, base your spending on a budget, this is far more productive. You can set aside precisely what you need for your bills, for shopping, and even for savings and investments.

How Much Debt Is Normal?

Some people have a lot of debt, some people have little debt, so there is no normal amount of debt. A better question to ask is, what is a reasonable or manageable amount of debt?

When you apply for a mortgage, one of the things the bank will want to check before accepting your application is affordability: based on your current income and expenses, would you be able to pay the additional cost of your mortgage each month?

You can use a simple ratio to figure out what percentage of your monthly income goes towards recurring debts. It is called the debt-to-income ratio, and it works like this: recurring monthly debt / gross monthly income = debt-to-income ratio.

For example, let’s say you pay R10,000 per month on your mortgage, R3,000 on your car loan and R3,500 on credit cards, and you earn R25,000 per month.

(10,000 + 3,000 + 3,500) / 25,000 = 0.66

This means that 66% of your income is being spent on recurring debt. Keep in mind that there will be other monthly expenses, such as food, clothing, household bills, car fuel, and repair bills, which vary from month to month.

Most financial advisors recommend that a good percentage is 35% or less spent on recurring monthly debts. If your debt-to-income ratio is higher than this, then it is best to try and get it down as soon as possible.

Where Can You Get Help If You Have Debt Problems?

At National Debt Support we understand that bad debt happens to good people. We know the stress, anxiety and sleepless nights which come with being overwhelmed by debt.

Our commitment is to provide the best service to our clients, helping them to manage their debt, showing compassion and earning their trust. We journey together with our clients guiding them to their financial freedom, so that they can live their best lives again.

We have a team of well-trained debt experts and debt counsellors ready to assist our clients in securing an affordable, personalised, monthly payment which will cater for all accounts. Through Debt Review, a government legislated process that forms part of the National Credit Act, we help South Africans reduce their debt repayments by up to 50%, end debt collector harassment, and legally protect their assets from repossession.

Call us on 031 010 0509, or request a free call back.