What to do when you fall behind on repayments

worried woman 3Lindi wrote to me looking for advice regarding her car repayments. She had fallen behind on her repayments to BMW Finance as her business was in financial difficulty. She wanted to find out if she could hand back the car to the financial institution and what the implications would be on her credit profile.

By the time I received the query, BMW Finance had already proceeded with action to take judgment against Lindi.

I asked Paul Slot, CEO of debt counseling firm Octogen to see if they could come to an agreement with BMW Finance on Lindi’s behalf.

As BMW Finance had already started with legal action against Lindi, she could not apply for debt review, however BMW Finance has agreed through a request by Octogen to halt legal proceedings if Lindi returned the vehicle.

“The bottom line is that Lindi has no funds available to catch up the arrears or maintain payments. In addition the credit agreement included a hefty residual value which makes it impossible to sell the vehicle for the outstanding balance,” says Slot who explained to Lindi that the only option available is to hand back the vehicle and take out a loan to meet the shortfall.

The problem is that Lindi left the situation too late and only took action once she was faced with a legal threat. By taking action earlier Lindi could have:

  • Negotiated an extended repayment period or
  • Sold the car privately, receiving a higher value than through a forced auction or
  • Applied for debt review

Negotiating with the bank

Rudolf Mahoney, head of research and public relations at Wesbank says typically there are two reasons a person falls behind. Either their expenses are increasing or their income has been affected by a retrenchment or job loss.

In the case where the client is facing a short-term financial squeeze, she can make an arrangement to pay a reduced instalment for a couple of months and once the expenses come back to normal, the client can repay the arrears that have accumulated over an agreed number of months. “WesBank even has this function on its online self-service portal so the customer doesn’t even have to call the bank,” says Mahoney.

If the problem is over a longer term, such as overextending credit, then the client can consider trading in the car for something that is more affordable. If that’s not an option, the client can opt to apply for debt review.

“If the account has been running for a few years, the client can request for the loan term to be extended, and the consumer must contact the bank to understand whether they qualify for this option.  As a last resort the client can voluntarily hand the car back to the bank in order for the bank to auction the vehicle,” says Mahoney.

The golden rule is to contact your bank well before the account falls into arrears. “Clients must not be embarrassed to do this – it is simply a business transaction that is not going according to plan,” says Mahoney.

In the case where a client has lost their income altogether, the bank will allow the client to stop payments for a month or two in the hope that the client will find employment again.

You should also immediately find out if you have credit insurance which covers retrenchment. In this case their repayments would be covered for a period of six months.

Opting for debt review

If you have reached a point where you genuinely cannot afford to meet the repayments (in other words you have cut back on luxuries like DSTV), debt review could assist in keeping the car.

Ian Wason of DebtBusters says the total amount owed, including residual or balloon payments, is used and extended over up to 84 months. “We then have mandates from the credit providers to reduce their interest rates to as low as 7,75% so it can make a huge difference in terms of monthly affordability, large savings in interest, and means that there is no residual at the end of it,” says Wason.

Slot says depending on the repayment amount available, the credit provider will waive the monthly fee of R57 and the interest rate can reduce to repo plus 2%. For example, if you purchase a vehicle to the value of R300 000 with a 25% residual value (R75 000) and apply for debt review, the fees and interest rate concessions can reduce your repayment by 20%.

Seven things not to do when you fall behind

  • Don’t wait for your credit provider to take action. Contact your credit provider before you get into arrears and request an extension of the repayment term. Positive results are never guaranteed, but when you’re not in arrears, you increase your chances of a positive outcome.
  • Don’t take on more debt to repay the arrears on your vehicle. By doing this you’re just postponing the pain. In 90% of cases, taking on extra debt “solves” the problem for only three months before you need to start dealing with an even bigger problem.
  • Don’t take a payday loan to repay debt. Not only is this loan expensive, it won’t solve your cash-flow problem.
  • Don’t just stop payments and wait for your credit provider to take legal action. They will obtain a judgement and take back the vehicle, then sell it for next to nothing – leaving you with no car plus a higher balance to repay.
  • Don’t keep the fact that you cannot pay from your spouse. Discuss your financial predicament as early as possible. In most cases early discussion leads to a useful solution.
  • Don’t stop your vehicle insurance when you are in financial trouble. Not only are you in breach of your credit agreement, but you also increase you risk profile.

– Information provided by Octogen

This article originally appeared in City Press.

2 CommentsLeave a comment

  • Thank you for the article. It is really sad that Lindi didn’t seek your professional help Maya, talked to the Bank or talked to a debt counsellor before it came to this. There were so many other options available, but many times people find it embarassing to seek help when their financial situation reach a point where they no longer can cope. As Mahoney points out in the article “it is simply a business transaction that is not going according to plan,” For the many people out there in a similar situation as Lindi, this article will surely help them a lot. Thank you.

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