My account balances don’t always make sense. Why?
While debt review provides protection from creditors through a structured payment plan, clients may in some instances find that their balances have not changed very much after the first 12 months. The reasons for this are as follows:
- For the first 2 months, the debt counsellor and the related legal fees need to be paid as this has been worked into your payment plan. During this period, your creditors will still calculate and add interest to your account and the balance will therefore increase.
- When your creditors start receiving payments, a relatively small portion of the installment will initially be allocated to repaying the capital amount, while most of the payment will be allocated against the interest that has accrued.Consider for example a payment of R400 per month at 15% interest on an outstanding balance of R15 000.
- In the first month the interest part of your R400 payment will be R188 and the capital balance will only decrease by R112 to R14 572. In the second month the interest will be calculated on a balance of R14 572 and the interest part will decrease to R185. After 36 months the interest part of your R400 payment will only be R72 and you will only owe R4 513. The R15 000 will be repaid in 50 months.
- The capital-to-interest ratio will gradually change each month, with a slightly bigger portion of the payment being allocated against the capital amount and a lesser portion being allocated against the accumulated interest.
- Your account balance will reduce at a much faster rate toward the end of your debt review period.
Should you have any further questions about this, please contact me – I will gladly assist.