Don’t let January’s cash crunch get you into more debt

Early December salary payments and impulsive holiday spending can mean that when there’s not much money left in January, people look for ways to cut back on expenses.

Marlies Kappers, Direct Axis head of marketing, says that while the New Year is a good time to reassess your spending priorities, be careful that a short-term problem doesn’t cause you to make rash decisions with long-term consequences.

“It’s better to be careful during the holidays and avoid the January cash crunch altogether, but if it does happen first try to cut back on unnecessary lifestyle expenditure rather than costs which could give you some financial security.”

She cites comprehensive car insurance as an example. It’s often considered a grudge purchase, which people are forced to take out when they finance a vehicle and consequently a cost that they feel justified in cutting, particularly when money’s tight.

It may be tempting to save some money on something you didn’t really want to buy and don’t think you need, but cancelling or not paying the policy because you have a short-term problem could put you in a much worse long-term financial situation,” says Kappers.

The reason banks and finance companies insist on you having comprehensive vehicle insurance is that until you’ve paid off the loan, the car belongs to them. This means that if it’s badly damaged, written off in an accident or stolen not only are you without a car, but you still have to pay them whatever is still owing on the finance agreement.

“Comprehensive car insurance will cover the cost of repairs or replacing the vehicle. While you’ll still have to pay any outstanding amount on the loan, at least you’ll still have a car to drive. Without it, the cost of repairs or replacement plus the outstanding finance costs could be a major setback, particularly if you need the car to earn an income or get to work.”

What’s more, in most cases, cancelling or defaulting on the insurance puts you in breach of the finance contract.

If the finance company discovers what you’ve done, it will enact the asset protection clause that is included in most finance contracts. It can enforce payment to make sure the debt is covered if anything happens to the car. This is not comprehensive insurance and only covers the outstanding debt, so although you will be debt-free you will still not have a car.

Rudolf Mahoney, head of brand and communications at WesBank puts this in perspective: “Imagine having to pay for accident damage which can run into tens of thousands of rands and still have to pay off your car. Will your budget handle that? Do you have the savings to cover such expenses?”

Consider the consequences carefully before making any hasty decisions which could put your financial future at risk. Last year 56 616 cars were stolen in South Africa – one every nine minutes – and in little over a month between 1 December 2014 and 7 January 2015 there were 1 147 crashes, one of the highest accident rates in the world.

For more about the different types of car insurance and what each covers visit this website

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