Johannesburg – With all the data pointing to South African households coming under extreme financial hardships due to uncontrollable credit, it is time to look into what to consider before putting pen to paper.
Emma Mer, the CEO of FNB Loans, says if taking on credit is carefully considered and well-budgeted for, it can assist you to better your life.
“Including income fluctuations when budgeting to ensure you can continue to repay your credit obligations in tougher times is a wise money management tip – it will also help you to take only the amount of credit you really need as opposed to the maximum available to you,” Mer says.
“Combine this with using credit for the right reasons such as renovations or assisting with education, and you can add value to your life.”
Data from debt counsellor DebtBusters shows that earners in all income brackets in South Africa are worse off compared to four years ago, with those taking home between R5 000 and R20 000 under most pressure.
Mer suggests considering these five things as part of your decision when taking up credit:
Why do you need credit
Before approaching a bank to apply for credit, you should have a clear idea of what you need it for.
When you know why you are borrowing, you can choose the right credit product for your needs and apply for an amount that matches the expense.
If you find that you are no longer able to live within your budget, the first port of call is to review your budget and spending, and cut expenses.
This could free up cash flow, resulting in you applying for a lower credit amount than you initially thought you needed.
Understand the types of unsecured credit available
Once you have made the decision to apply for credit, choose the type of credit best suited for your needs.
A credit card is for day-to-day transacting while a personal loan could be the right fit for those who need to pay for larger expenses such as renovating or education, and want to know what their monthly repayment will be.
If your concern is not having enough funds available for next month’s debit orders, then a facility linked to your current account will help you bridge your finances from one month to the next. Responsible lenders will always caution against taking out any form of credit to pay for other credit repayments.
Using credit to service credit can easily spiral into debt levels that become unmanageable.
Consider the fees associated with the credit
Different types of credit have different fee structures.
Servicing credit includes an initiation fee and monthly servicing or admin costs. Some types of credit will also include insurance fees.
Don’t forget to take these into account together with the amount borrowed and interest rate.
Be mindful of interest rates An interest rate is an amount that the bank or financial institution charges because you are borrowing the money from them – it is charged on top of the money loaned. Having a good credit record, which suggests that you are a reliable consumer to lend to, could mean that you get a more favourable interest rate. Remember that different financial institutions use different credit models to assess the credit worthiness of consumers and therefore the interest rates might differ.
Consider the length of the loan and how you plan to pay it off
Before signing any credit agreement, it is highly advisable for consumers to ask questions, and understand what they are committing themselves to.
Ideally, you should choose credit that can offer you the lowest possible interest rate at a repayment term that you can manage.
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