If used correctly, credit can add positive value to your financial well-being. But you need to ensure you understand what the total amount is that you will repay, and if that amount is reasonable for the need you want to use the credit for, whether it be for renovating your home or paying for your child’s education.
We have all seen the adverts encouraging us to take a loan or buy something with credit because it only costs R250, R500 or R1 000 per month. What does that mean and how much are you paying in total?
Let’s look at an example. Say you would like to borrow an amount of R100 000 over a period of five years. The quote that you receive from the financial institution says that you get an interest rate of 15% and the monthly instalment is R2 508.46.
This is how the credit provider will calculate your instalment amount:
- Capital (or principle) amount: That is the actual amount that you borrow. In this instance, it’s the amount of R100 000.
- Interest rate: That is how much the financial institution is going to charge you for borrowing the money. The amount charged will depend on your credit score.
In this example, the interest rate is 15%.
- Monthly service fee: These are the fees the financial institution will charge monthly to administer the loan. These normally range from R50 to R115 per month. In this instance let’s assume that it is R69 per month.
- Initiation fee: The amount the financial institution will charge for the loan documents and admin for starting the agreement. These are about R1 000 per loan. Let’s assume that this one is R1 207.50.
- Consumer Protection Plan: This is insurance that will pay out and cover the outstanding amount on the loan in the event of death, disability or temporary loss of income. Let’s assume that in this instance it is R324 per month.
All these amounts add up to the total cost that you will pay for the loan over the term. The total amount that you will pay for this loan: R100 000 + R50 507.60 = R150 507.60 (capital amount + interest/fees = total amount payable over the term of the loan).
- Ochse is product head, FNB Money Management
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