What Is a Default?

According to DebtBusters, people spent around two-thirds of their net income on debt repayments in 2021, and the situation is likely to deteriorate in 2022, thanks to factors like the petrol-price increase, higher food prices, and flat salary growth.

For some people, it is difficult or even impossible to service their loans and debts. Some may pay late or in part as they try to catch up, or they may skip payments altogether.

“A default occurs when a borrower of credit is not able to meet payments timeously, or simply avoids making payments,” says Ayanda Ndimande, Head of Branch Lending at Sanlam. “This obviously has consequences, like a bad credit record that can escalate to a judgement.”

Credit providers may be forced to hand you over for collection or legal action to recover monies owed. In a worst-case scenario, you could end up losing the car or home you can no longer pay for. Nobody wants to face this eventuality – and the good news is, there are ways to avoid it.

Best Ways to Avoid a Default

Assuming you have not defaulted on your loans or debts – or you have gotten your finances back on track – there are ways to avoid falling into default.

“The best way to avoid this is to not take on any further debt,” Ndimande recommends. It is especially important to avoid taking on more debt to settle existing debts, which perpetuates the debt cycle (apart from using debt consolidation as a tool).

“The next step is to make a budget and stick to it, with the help of a credit management coach if needs be,” Ndimande says.

It’s important to keep an eye on your credit record and track your progress, particularly if you want to ensure that your credit score remains healthy.

“Always make regular payments, and pay off or reduce debt when you have any extra cash – say, if you receive a bonus, payment for working overtime, or monies from a ‘side hustle’,” Ndimande says. “It may be tempting to spend that money on little treats, but if you do have debt, it is better to pay that off first.”

A default is not the end of your financial wellness as your financial situation can change. However, it is wise to avoid defaulting as far as possible. If you do find yourself in this position, take immediate steps to remedy the situation.

Tip: Sanlam Confidence Rule #68 says: “Knowing your credit score is good. Understanding it is better.” Visit your credit dashboard regularly, update your budget, and keep an eye on your credit accounts to maintain a healthy credit life.

This article was prepared by JustMoney.