What happens when you can’t make your car or home repayments?

Key takeaways

  • Don’t go underground if you find yourself unable to repay debt. Discuss your options with your credit provider.

  • A part payment won’t cut it. You will still be in default.

  • Payment holidays are not a panacea. When you can get them (for example, in times of pandemics), they can come at a cost.

  • Restructuring your debt will reduce your monthly instalment but increase your debt (the term and the amount payable) over time.

  • If your financial difficulties are temporary, you may be able to restructure the arrears.

  • When your account is in default, charges will be added.

  • Deal directly with your creditors and try to avoid your account being handed to attorneys, which will add a layer of costs.

  • If you do not make arrangements to repay your debt, lawyers will send a letter of demand and proceed to get a judgment against you.

  • Don’t refuse help such as debt review, debt consolidation or assisted-sales programmes.

When you are facing tough economic times, you may struggle to keep up with repayments on your home loan or vehicle or any other credit agreement that is secured by an asset.

If you find yourself in this predicament, you should be aware of the consequences of defaulting on your repayments.  You should try to avoid this situation at all costs.

Don’t go underground. Consider your budget before you default and what you could afford to forgo, and how you could find the money to make up the missed payment or what money you could put towards the repayment.

Don’t just pay what you can afford. Paying a little is better than paying nothing, but if you pay less than your instalment your account will still go into arrears which places you at risk of legal action.

You have to reach out to your creditor, discuss your options and make a plan to bring your arrears up to date.

If you miss a payment, the credit provider will contact you to discuss how you can catch up.

If you miss three payments, you will be considered to be in default and will become liable for default administration costs on top of your debt.


Your options

Consider these options when you decide how to tackle your situation:

Credit life: If you have lost your job or you are unable to pay because you are ill or injured, check if you have credit life cover that will cover your repayments until you return to work, or at least for part of the time you are unemployed or recovering. Read more: What is credit life cover?

Payment holidays: Don’t expect your credit provider to give you a “payment holiday”. Since the Covid-19 pandemic, these are rarely granted by the banks. During a payment holiday, you don’t have to pay your instalments for a couple of months or worry about your account being handed over to lawyers. But, while you enjoy short-term relief, interest continues to accrue on your account. This means that the payment holiday comes at a cost to you, adding to your debt burden over time.

Extending your loan: In the case of a home loan, your bank may be willing to extend the term of your loan. This is called a restructure. While it will bring down your instalment – giving you monthly relief – you will pay more in interest over time. The benefit of going this route is that should your circumstances improve, you can opt to pay extra into your home loan which will in turn reduce the term of your loan and the interest portion.

Restructuring your arrears: If you have been unable to pay your home loan due to an emergency expense or some or other short-term problem and you can’t settle the arrears, you can ask the bank to restructure the arrears portion only. This is called a “respread” and results in you paying a bigger instalment over the rest of the term. The bank will only agree to this if you can prove that you can afford the higher instalment.

If the bank agrees, it will monitor your account strictly over the following six months. If you diligently pay the higher instalment, only then will the respread get processed. When this happens, the arrears portion gets cleared from your account and the slate is wiped clean in that there is no record of your being in arrears. Note, however, that no debt is written off.

Voluntary surrender: The National Credit Act gives you the right to terminate any secured loan or instalment sale agreement. You need to inform the credit provider in writing that you wish to surrender your home, car or other goods.

The credit provider must then sell the goods and inform you what it realised. If the amount realised is not enough, they must inform you of the shortfall that you need to pay. If the credit provider sells your home or car or other goods for more than what you owe, they must repay the balance.

Doing nothing is not a good option

Don’t ignore your problem. If you do not make an arrangement with your creditor and leave your account unpaid, it will be handed over to lawyers for debt collection. Once that happens, you are in for legal fees, which get added to your debt. These can be substantial.

With home loans, the account is usually only handed over to lawyers after six months. It can, however, be after three months, depending on the bank. Leading up to this, you will have received numerous communications from your bank via WhatsApp, SMS, email and phone calls. Their appeal to you will be to make a payment arrangement to pay your monthly instalment and something towards the amount in arrears. Don’t ignore these messages. The sooner you face your problem, the better.

Once the account is with lawyers, it will remain with lawyers until the arrears are paid, or the account is respread or the property is sold, because the lawyer’s mandate is to recover the arrears.

The longer a lawyer is involved, the more it will cost you. Once a summons has been served, you are in for anything from about R6 000 in additional costs. The costs can be much higher depending on the amount of arrears and the time it takes to recover them.

Before a summons is issued, you will be sent a letter of demand or section 129 notice. Read more: Why should I not ignore a letter of demand?

If you ignore a letter of demand, the credit provider’s lawyers will issue a summons and might attempt to get a summary judgment against you.

Judgment against you

If judgment is taken against you, the court may order:

  • You to pay the outstanding amount in full. This judgment can be enforced if you fail to pay. A sheriff can be sent to collect your goods, repossess your car or home and sell them to recover the outstanding debt.

This means your car, house or other asset can be repossessed. A sheriff can be sent to your home or workplace to collect your vehicle or notify you that your house is being repossessed to be sold on auction or at a sale in execution.

You may still owe on the debt if the sale of the repossessed goods fails to cover the debt in full.

When a creditor forecloses against you or takes repossession of an asset, the process from start to finish varies greatly and can cost anything from R25,000 to R50,000.

An emoluments attachment order may be put on your salary. This order will instruct your employer to pay installments to your creditor until your debt is paid in full. This is paid over to your creditor before anything is paid to you.

Don’t refuse help

Don’t be stubborn and ignore offers for help. If your debts and living costs have become unmanageable, you may be eligible for debt review. Read more: What is debt review?

Alternatively, a debt consolidation loan may help you. Read more: What is a debt consolidation loan?

All of the banks offer an assisted-sales programme to customers with home loans. These programmes are aimed at preventing a sale in execution, which leaves you worse off because properties fetch lower prices when sold via a sheriff’s auction than when sold on the open market. Banks estimate that when sold at a sheriff’s auction, properties typically sell for 50 to 60% of their value.

When your home is sold via auction and the sale price doesn’t cover the debt, the bank makes you sign an “I Owe You” for the shortfall. However, if you find yourself with a shortfall after using the bank’s assisted sales programme, most banks will give you a discount on the shortfall and offer you interest-free terms to pay it off. So, it pays to work with the bank when you are dangerously behind on your home loan instalments.

Your credit report

As soon as you miss a repayment and pay it late, your default may be reported by your bank or other creditor to the credit bureaus. Your credit report may then reflect that you are a slow payer and this can adversely affect your credit score.  
If your account is handed over to lawyers this will also be recorded on your credit report and will adversely affect your credit score.
If judgment is taken against you, this will be recorded on your credit report and will stay on it for at least five years. 

Read more: What is my credit report? and What is a credit bureau?