Have you ever wondered how it is possible for a loan balance to increase even though the loan is being paid off? Instead of getting closer to zero, the outstanding amount goes the other way. There are a number of factors which could affect this. It is common for the original terms of the loan to be somewhat modified and this causes the usual course of the debt to change.
The Cost Of A Loan
Besides the amount that you borrow, there are a few other charges that come along with borrowing money from a credit provider:
- Service Fee – Credit providers will charge you a monthly service fee for administration costs
- Interest – You will need to pay a certain percentage of the amount borrowed to the credit provider as the cost of borrowing that money
- Initiation Fee – A once-off fee in the first month
- Default Admin Fess – Charged when you fall behind on payments
- Collection Costs – A fee charged for the collection of unpaid debts
- Credit Life Insurance – Many credit providers provide credit life insurance that pays back the debt in the event of death or dread disease
These other costs make the debt more expensive. Your monthly debt repayments are calculated and take all of these costs and fees into account. Usually the term of a loan agreement is fixed. Debts can be paid back in a number of periods – as short as a few days and up to 20 years for home loans.
What Happens When Debt Repayments Are Missed?
The debt repayment period is based on the assumption that the debt will be paid back in equal instalments every month for the duration of the loan. In reality, debt repayments often get missed for some reason or another. Consumers also short-pay or pay their monthly repayments later than expected.
By missing repayments or short-paying your debts, you modify the original credit agreement. Penalties are charged for missed debit orders. Short-payments will result in charging extra interest and penalties in future months as the capital balance is higher than expected.
Missing debt repayments is bad as this will affect your credit score. Credit providers can also take legal action against you should you be in breach of your credit agreement.
Can I Negotiate For Lower Monthly Repayments?
You can approach your bank or loan provider to try an negotiate new terms. If successful, these lower repayments will be an informal arrangement and the credit provider will have the right to revert back to the original terms and ask to catch up in full at any time. Lower monthly repayments will decrease the will increase the payback period and cost you more in the long run.
How Does A Loan Balance Grow Instead Of Shrink?
Sometimes paying a lower monthly amount towards your debt won’t even cover the interest portion. This is how your debt actually grows instead of shrinking each month. Let’s look at an example.
Let’s say that you borrowed R10,000 and your monthly repayments were R1,000 for 16 months (The extra R6,000 includes all interest and fees.) Of the R1,000 monthly repayment, R600 pays off the capital and R400 goes towards interest and fees. If you couldn’t afford the R1,000 and instead could only pay R300 per month, you would not be paying back any of the capital balance as the interest and fees get paid off first. In fact, by only paying R300 per month, you are short R100 in terms of the interest and fees and theoretically your debt will grow by R100 each month and not reduce at all.
Why Is It Important To Pay Back Your Loan On Time?
It’s important to know the consequences of missing debt repayments or short-paying your debt. By doing this, you actually are in a breach of your credit agreement. Your account on you credit report will go into arrears which will damages your credit score. Banks and credit providers use your credit score to determine your level of risk .
A lower credit score will reduce your chances of getting credit in the future. Some employers also check your credit report when you apply for a job. It is important to check your credit score every year. After many missed payments, credit providers could initiate legal action against you and sue you for the money owed. This legal action has a negative influence on your creditworthiness and leaves a mark on your credit report.
What Should I Do If I Think I May Miss Debt Repayments?
I you feel that you are struggling to pay back all of your debts on time, you need to have a serious look at your budget. List your income, living expenses and debt repayments on a piece of paper or an excel spreadsheet. See where you are possibly overspending and see if it is possible to cut down on certain costs such as luxuries and other unnecessary expenses. If you are already in deep water and need help, contact a debt counsellor for some advice.
A debt counsellor can assist you by reducing your monthly debt repayments, with the approval of your credit providers. Debt counselling is for consumers that are over-indebted. Debt counsellors can also provide you with legal protection and reduce your interest rates and fees. The aim of debt counselling is to get you debt free and make your debt more affordable. The term of the loan is stretched, which reduces the monthly repayments.