Debt trap - don't fall into it

Getting into debt is easier than you think. Nicolette Dirk talks to two ordinary South Africans who found themselves caught in the debt trap after initially only taking out a few loans.

Anyone can get into debt. Celebrities like rapper, MC Hammer and actor, Nicolas Cage, are proof that when you handle you money irresponsibly debt is always the unpleasant consequence. Both stars’ lavish lifestyles landed them in hot water and hefty bills.

According to reports, Cage had to sell many possessions to make amends to the Internal Revenue Service (IRS) for the $13 million he owed. This was besides the $150 million fortune he wasted on extravagant luxuries. MC Hammer followed the same destructive path of overspending that led him to dealing with debt of $13 million by 1996.

Earn big, spend big

High earning South Africans are also learning the hard lesson that more money can lead to more problems. In one case study an information technology manager from Johannesburg, earning R55 930 a month, had to turn to Debtbusters for assistance after he couldn’t make ends meet.

Living in a flashy Johannesburg suburb, John Smythe* and his family felt the pressure to keep up with the Joneses. To maintain this lifestyle meant taking out personal loans buying things on credit. To finance an expensive BMW (to impress his neighbours) he had to take out a loan from the bank.

After deductions of monthly expenses of R14, 0421.74, he was only left with R20, 054.00 at the end of each month. But with a total outstanding debt amount of R1, 533, 074.39 and with R20, 054.00 left to spare at the end of each month, he was unable to service his existing debt and fell into arrears on all his debt payments.

Paul Slot, president of the Debt Counsellors Association of South Africa, says that if you are spending more than 50% of your income on debt repayments it spells trouble.

“The challenge for many people is making lifestyle changes. For high income earners it usually means giving up that ski-boat or motorbike. But the sooner people come for help when they feel they are facing debt problems, the easier it is to help them,” says Slot.

How the debt spiral is formed

Already in a tight financial spot, Smythe took out another loan to avoid losing his house and pay off the interest rates of his existing home loan. He took out a third home and another personal loan from the bank to repay his existing debt. To complicate matters, the interest rates for his loans were not very favourable.

“So many people believe in the myth that one loan will help them out with the other. They start off with good intentions when it comes to taking out a loan but they soon land in the debt web because of multiple loans,” says Slot.

Debt can affect any income earner

Just because you have fewer repayment commitments than people in higher income brackets, doesn’t mean you cannot become a victim of the debt trap. Just ask Le-Anne Pretorius* a 26-year-old paramedic earning R8 500 and taking home R7, 538.00 after deductions.

Pretorius put herself through training through a student loan. Slot says a loan for your studies are one of the few worthwhile reasons for getting into debt. But Pretorius also had bad spending habits and money management skills. Traits she inherited from her parents, who also struggled financially.

While spending more than she could afford, she began to struggle to pay off her student loan. To service her existing monthly debt repayments, she took out an additional personal loan from the bank. Before she knew it, she was unable to meet her monthly debt repayments. This meant taking out more loans to pay her monthly instalments on her store accounts and credit cards. In the end she had to contact debt counselling agency DebtBusters for help.

There’s a famous proverb, which says: ‘The road to hell is paved with good intentions’. Slot says that the thousands of cases he has worked with are mainly caused by people who got into debt to finance a lifestyle. So remember, as alluring as that diamond ring or Gucci outfit might look, the repayment can takes years of your life, to recover from.

For more information about how to get your finances in order, click here and to deal with debt fast click here.

*Not their real names.