Don’t use your December repayments for Christmas

The festive season is traditionally the time to go all out and enjoy the fruits of the year. While caught up in the frenzy, it’s easy to blow the budget and forgo financial responsibilities. This can have grave repercussions.

We spoke to Calvin Ndlovu, head of operations at FNB Home Loans, about the effects of financial overindulgence, and what you can do to avoid it.

Tip: If you're struggling with debt, apply for debt consolidation here.

The impacts: Interest accrual

It may seem safe enough to miss a single bond instalment in order to fund seasonal luxuries, but this will have ongoing consequences, Ndlovu says.

"Even if you catch up on your arrears, and avoid a late payment penalty, there will be additional interest accrued on the outstanding capital," he says.

Ndlovu points out that there’s often an extended stretch between December and January salary payment, as December payment is often made early. This makes it difficult to catch up with repayments during that period. Rather than miss a repayment, budget properly for your Christmas spending.

Credit record consequences

While your bank can make arrangements for the repayment of arrears, there will still be an impact on your credit record, says Ndlovu.

A full or partial payment default will reflect on your credit record after 20 days, and it will remain there for as long as you are in arrears. This may impact your ability to apply for, and receive credit, as the active payment record will remain on your credit profile for a period of two years.

"On average, we find that one missed repayment takes four months to be caught up. After three missed payments the bank will proceed with legal action. This could ultimately put you in danger of losing your home," says Ndlovu.

Avoidance measures: Prepay instalments

One of the ways to avoid a December default is to prepay your bond instalment, plus a little extra, in part amounts throughout the year. If you accrue more than one repayment in credit in your bond reserve, missing a repayment will have no effect.

"This is a far better and more effective option than going into arrears,” Ndlovu says. “Not only will you save your credit record, but you will also have the advantage of reducing the interest on the capital amount for the period that you have prepaid," says Ndlovu.

Payment holiday

Another option is to ask your bank for a payment holiday. These are normally three-month terms in which you make no repayments. However, in the six months following, you will have to pay extra to make up the arears. Interest will also accrue over the period.

FNB offers two other options when it comes to payment holidays:

• A reduced payment of 80% for a period, followed by step-up payments every 6 months until the arrears are cleared (maximum term of the arrangement is 24 months).
• Debt consolidation, provided the customer can afford to repay the higher bond amount, and there is sufficient equity in the property to cover the additional debt.

FNB advises that you apply for your payment holiday one month in advance, while Standard Bank advises you to avoid payment holidays altogether.

Steven Barker, spokesperson for Standard Bank, says, "We don’t encourage consumers to suspend the monthly instalment on any of their debt. It’s difficult to make up the payments, along with any interest that’s incurred.

“However, we do recommend that contact be made with the bank in the event of financial difficulty, to try to find a way forward."