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Avoid loan sharks.
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Pretoria - Taking out a loan to fund your existing debt is the slippery slope to debt hell. There are essential questions you need to ask before taking out a loan.
1. Is this a cost I should fund with a loan?
Don’t go into debt to pay for something that you don’t really need - or that is not an asset.
Paying for tickets to Mauritius on your credit card, or taking out a personal loan to pay for a flat screen TV that you really ‘must have’, is a dangerous practice. It pushes up your total indebtedness, and not for the best of reasons.
You’d be better off saving for these things; should you hit a financial speed wobble (you crash your car and have to find money for an excess, for instance) you have a stash in a savings account instead of an extra item on the budget each month to pay off.
You should never take out a loan to fund your existing debt. That’s the slippery slope to debt hell, with a debt that simply grows and grows until it’s a monster that eats you alive. Rather opt for consolidation or debt counselling.
2. What are the interest rates?
You won’t necessarily be offered the same interest rate by every bank or financial services company, so do some homework and shop around.
3. How much will I pay in total?
Ask how long the repayment period will be, and how much the repayments are. You can then work out the REAL cost you’ll be paying, and figure out if it’s worthwhile.
If you want the loan to pay for a new laptop but find out that thanks to compound interest, over the total period of the loan you’ll end up paying R15 000 for a laptop that costs R10 000 cash down, you might opt to refurbish your old one for a couple of grand and save for a new one.
4. Can I afford this loan if the rates change?
Interest rates in South Africa have been pretty stable for what seems like a long time – over the last few years, all we’ve seen is reductions.
But there was a time in the 1990s when interest rates shot up as high as 24%; repayments on home loans, vehicle finance and other debt rose so much that many people fell into serious difficulties.
Can you comfortably afford the repayments on this debt? If interest rates rose significantly, would you be able to continue to pay? What if you had to take a pay cut, as has happened to a number of people in recent years?
5. What happens if I default?
Find out upfront what the financial services provider’s policy is for those who find they can’t continue to pay.
Would the company be willing to reschedule your debt (allow you to pay it off over a longer period), for example? It may be unpleasant to imagine worst-case scenarios, but it’s always better to be prepared.
- Fin24
Add your voice on the Debt Issue:
*Ask our experts
*Share a personal story
*Write a guest post
1. Is this a cost I should fund with a loan?
Don’t go into debt to pay for something that you don’t really need - or that is not an asset.
Paying for tickets to Mauritius on your credit card, or taking out a personal loan to pay for a flat screen TV that you really ‘must have’, is a dangerous practice. It pushes up your total indebtedness, and not for the best of reasons.
You’d be better off saving for these things; should you hit a financial speed wobble (you crash your car and have to find money for an excess, for instance) you have a stash in a savings account instead of an extra item on the budget each month to pay off.
You should never take out a loan to fund your existing debt. That’s the slippery slope to debt hell, with a debt that simply grows and grows until it’s a monster that eats you alive. Rather opt for consolidation or debt counselling.
2. What are the interest rates?
You won’t necessarily be offered the same interest rate by every bank or financial services company, so do some homework and shop around.
3. How much will I pay in total?
Ask how long the repayment period will be, and how much the repayments are. You can then work out the REAL cost you’ll be paying, and figure out if it’s worthwhile.
If you want the loan to pay for a new laptop but find out that thanks to compound interest, over the total period of the loan you’ll end up paying R15 000 for a laptop that costs R10 000 cash down, you might opt to refurbish your old one for a couple of grand and save for a new one.
4. Can I afford this loan if the rates change?
Interest rates in South Africa have been pretty stable for what seems like a long time – over the last few years, all we’ve seen is reductions.
But there was a time in the 1990s when interest rates shot up as high as 24%; repayments on home loans, vehicle finance and other debt rose so much that many people fell into serious difficulties.
Can you comfortably afford the repayments on this debt? If interest rates rose significantly, would you be able to continue to pay? What if you had to take a pay cut, as has happened to a number of people in recent years?
5. What happens if I default?
Find out upfront what the financial services provider’s policy is for those who find they can’t continue to pay.
Would the company be willing to reschedule your debt (allow you to pay it off over a longer period), for example? It may be unpleasant to imagine worst-case scenarios, but it’s always better to be prepared.
- Fin24
Add your voice on the Debt Issue:
*Ask our experts
*Share a personal story
*Write a guest post
