Debt Stressed? Will Your Bank Help You or Themselves?

John Vaughan (Financial Advisor) @ Lucid Living

In order to mitigate burgeoning bad debts, banks have established “credit rehabilitation” departments. The role of these departments is to provide clients with alternatives (i.e. restructuring repayment terms) to debt counselling. Banks aggressively promote the use of this service and commit to “helping you” their valued client.

We contacted Standard Bank’s Credit Rehabilitation Department, to investigate. If you cannot afford to keep up with your monthly instalments on your homeloan, Standard Bank proposes the following “credit rehabilitation” options –

Terms and Conditions 6 Month Credit Rehabilitation Plan 12 Month Credit Rehabilitation Plan
Instalment Reduced by 50% for 6 months Reduced by 30% for 12 months
Lump Sum payment Not applicable (current instalment – new instalment) * 12 * interest charges – paid in month 13
Discounted Instalment (current instalment – new instalment) * 6 * interest charges – added to total cost of credit Not applicable
Term of facility Extended to 30 years – mandatory Extended to 30 years – unless lump sum payment, in which case current loan period applies
Interest Rate Linked to Prime Rate – any rate concession falls away Linked to Prime Rate – any rate concession falls away
Access Bond facility Access Bond facility falls away Access Bond facility falls away

What does Credit Rehabilitation mean for you?

Value of Home Loan Interest Rate (%) Term (Years) Instalment (Monthly) Total Cost at End of Term
Current Home Loan R500,000 8% (Prime Rate less 2% concession) 20 R4,182 R2,463,401
Credit Rehabilitation Plan R500,000 10% (Prime Rate) 30 R4,387 R9,918,699

If you elect either of the Credit Rehabilitation Plans offered by Standard Bank, you end up –

  • Paying more – by extending the term of your loan and losing your interest rate concession the cost of credit increases dramatically – you end up paying 400% more; and
  • Increasing the risk of repossession – if you default on any one instalment under the Credit Rehabilitation Plan or you cannot repay the Lump Sum, the bank will immediately proceed with legal action and you will be precluded from entering debt counselling.

The Credit Rehabilitation Plan is structured to benefit the bank and not you (the client). The bank enhances its income earning potential and reduces its risk (by preventing you from exercising your right to debt counselling).

Why do banks NOT want you to go into debt counselling?

It’s simple – because debt counselling benefits you (the client) and not the bank.

Debt Counselling offers consumers the following benefits –

  • Banks cannot take legal action against you – provided you comply with the debt re-arrangement order;
  • Your monthly instalments are reduced to a level that is affordable;
  • You maintain possession and enjoyment of your assets (viz. home and car); and
  • The cost of credit is reduced – the interest rate on your credit facilities is reduced.