Don’t panic: Consider the consequences of financial decisions
22 Apr 2020
“DON’T panic” was once said to be the best advice given to humanity. It definitely applies when it comes to managing your finances during the Covid-19 crisis.
The phrase became iconic, certainly amongst science fiction fans, after Douglas Adams wrote that it appeared in large, friendly letters on the cover of the Hitchhiker’s Guide to the Galaxy, a fictional device to help travellers navigate the universe.
In his novel of the same name Adams explains that this was because the guide “looked insanely complicated” to operate and also to keep intergalactic travellers from panicking.
Shafeeqah Isaacs, the head of consumer education at financial services provider, DirectAxis, says the situation in which we now find ourselves fits the definition of insanely complicated.
“It’s unprecedented this century. We don’t know what’s going to happen and thanks to the internet and social media there’s a massive amount of potentially confusing information available. Navigating this situation will require a clear head especially when it comes to making financial decisions.
“Not knowing how the crisis will affect the economy and how this will impact on your personal circumstances is scary. People panic when they get scared and can make rash decisions without thinking through the longer-term implications.”
According to DirectAxis here are some immediate considerations you should be aware of when making financial decisions now, which may have long-term consequences.
Most importantly. If you can, keep up your payments.
If this really isn’t possible, then consider claiming on your credit life insurance. Many loans, including those that DirectAxis offer, come with mandatory credit life insurance.
This covers you and your dependents for either the full outstanding amount you owe on the loan in the case of death, permanent disability and some dread diseases or up to 12 months of instalments in the event of retrenchment. Cover differs by policy so check yours.
The same approach of paying if you can apply to the measures many banks and other financial services providers have put in place to assist financially stressed consumers.
These include so-called ‘payment holidays’, which allow people to delay a certain number of loan repayments.
If you’re worried about your future income, it may be tempting to apply for this assistance now even if you don’t absolutely need it.
What’s important to understand though is that although the payments may be temporarily suspended, interest and fees do keep accumulating.
This means that if you take a payment holiday at the end of the day, you’ll pay more than you would have if you’d kept up the instalments.
But don’t delay in asking for help if you really are struggling to make your monthly payments.
The consequences of simply not paying can be significant
Firstly, it can invalidate your credit life insurance. There is a limited grace period if you stop paying, but, be aware that once it is over you are no longer covered.
If you stop paying your loan and are later retrenched or lose your income you may not be able to claim on your credit life insurance and will then still have to pay what you owe on the loan.
Also consider that banks and other credit providers are more likely to provide relief, such as payment holidays to customers who they know are reliable. If you do need this relief but have simply stopped paying, it may disqualify you.
Not paying your monthly instalment will also negatively affect your credit score.
While you may not think this is something to worry about now, remember that because international ratings agencies recently downgraded South Africa, banks and other financial services providers will tighten their lending criteria.
The better your credit score is the more likely you are to be able to access loans and other financial products, an important consideration in an uncertain time.
You can check your credit rating as often as you like for free and find out how to improve it by visiting: https://www.directaxis.co.za/pulse/credit-rating
So, if you are struggling, speak to your bank and other creditors to see if you qualify for any of the financial assistance measures. Perhaps you can claim on a credit life policy, or you qualify for the assistance they are offering or can come to some re-payment arrangement
“Douglas Adams’ appeal not to panic is as instructive now as it was nearly 41 years ago when his bestseller was first published. With the world in turmoil, now is not the time to make impulsive decisions about your finances.
Rather seek out reliable information, consider the options, find out what the implications may be and if in doubt speak to your bank or a professional financial adviser,” says Shafeeqah.