In the complex landscape of personal finances, debt has become a common tool to achieve our aspirations, whether it’s purchasing a home, vehicle or covering that unexpected expense. However, the importance of honouring debt repayments cannot be overstated. Missing even a single payment can have far-reaching consequences that can severely impact your financial well-being and your creditworthiness in the future. It can also start a trend of bad payment behaviour.

What Is Considered A Debt? 

To put it simply, a debt can be defined as the amount of money borrowed by an individual from a credit provider with the expectation of a repayment of a selected period of time. Borrowing money from a credit provider acts as a financial tool that consumers can use to bridge the gap between their current financial position and their desired goal or objective. The amount of money that the lender may extend to the consumer can depend on various factors including, but not limited to, their credit score and their overall affordability.

What Is Interest And How Is It Charged?

For lenders or credit providers, charging interest is a method used in order to generate additional income. Additionally, a bank or credit provider may charge interest on accounts as you are gaining the ability to spend money, instead of having to wait many years to save your hard earned money. 

How interest is charged on your account varies on the type of credit extended to you. In the case of a credit card, the interest rate charged varies according to a number of factors. If the balance remains unpaid, it is carried over to the next cycle. Essentially, if you fail to repay your credit card or loan by a certain time period, the credit provider or bank can impose penalties  and fees in order to get you to pay the full balance. In addition, the interest portion will be higher due to the missed debt repayment. 

On a home loan or vehicle finance, the interest charged on the account will be based on the principal amount and loan term. However, it is important to note that certain loans have varying interest rate calculation methods. In most cases, the interest charges are often included in your monthly repayment to your credit provider, reducing the principal balance over a certain period of time. Therefore, it’s important to carefully review your terms and conditions on how the interest rate will be charged with your credit provider before agreeing. 

Why Do People Miss Debt Repayments Or Short-Pay?

Generally, when people miss debt repayments or short-pay their accounts, this means that their net salary along with their expenses, can no longer cover their debt repayments. This can be due to the following reasons:

1. Poor budgeting or no budget at all
2. High debt utilisation
3. Living above one’s means
4. Insufficient income; and
5. Focusing on other financial goals 

Short-paying your accounts can lead to your repayments barely covering the interest amount on the account. Subsequently, short-paying could allow the credit extended to you to grow quite significantly over a period of time. With short-payments, credit providers are able to charge additional interest and fees on the account. 

What Happens When You Miss A Payment?

In the case of missing a repayment, credit providers and banks may impose stricter action. With a missed payment, the credit provider or bank may impose fees or penalties due to non-payment. Your debt can grow quite significantly and credit providers and banks can impose further interest on the arrears on the account. If you miss more payments, the credit provider and banks may take necessary steps to retrieve the funds owed to them. This can be done by the means of repossession. As your assets present security to you, the credit providers and banks are within line to repossess the items once a judgement has been secured. 

What Are The Further Impacts Of Missing A Debt Repayment?

Sticking to your debt repayments is crucial. When you applied for a line of credit from a bank or credit provider, you entered into a legally binding agreement which you would need to honour. However, in the case of missing a debt repayment, it can create a number of problems. Credit providers may contact you to demand payment or handover your account to a debt collector or lawyers. 

Once handed over to a debt collection agency, they may contact you to demand payment. The debt collectors can even take it as far as visiting your place of employment. Credit providers and banks may be able to take legal action against you and try to secure a judgement against you. This can severely affect your credit score. Furthermore, credit providers and banks may demand payment through the judgement or court order.

What Happens When You Go Into Debt Counselling?

Debt counselling is a legal process whereby the debt counsellor can renegotiate your instalments and interest rates with your credit providers. This can significantly reduce your monthly instalments to a more manageable and affordable repayment. In this process, your debt is consolidated into one simple payment. Under debt counselling, your interest rates are lowered and fixed for up to 5 years. This means that you are able to save money each month. 

If you are currently struggling with debt, and looking to consolidate your payments, contact us for more information. Our debt experts will guide you through one of our free financial assessments. Additionally, provide you with sound financial advice and give you some tips on how you can improve your credit score.