IT’S almost impossible for one to go through life without borrowing a single cent to get ahead. Unless you are the lucky recipient of a large inheritance, taking out loans is inevitable. It’s important to note that not all debt is bad. However, managing financial matters and borrowing responsibly should be on top of your priorities.
WHAT IS GOOD DEBT?
Theunis Kruger, head of unsecured lending at Standard Bank, says good debt can be defined as debt that is a strategic investment in your financial future. “It should leave you better off in the long-term and should not have a negative impact on your overall financial position,” he explains. “Good debt is also accentuated by the knowledge that you have a clear and specific reason for taking it out, and a realistic plan for paying it back that allows you to clear the debt as quickly and cheaply as possible, or in a series of regular and affordable payments.”
SMART WAYS TO USE A LOAN
Using a loan wisely can be beneficial in many ways. “The trick is to view the use of credit as a tool to invest in your future rather than a way to live a life of luxury in the short-term,” Theunis warns. He adds that the main reason people get over-indebted is because they use credit to fund a lifestyle that they cannot ordinarily afford. “Credit is a great tool to assist people to purchase items that their regular cash flow does not allow but when it is used to live beyond their means, it can quickly become a financial and emotional burden,” he points out. But because you can’t go through life without ever borrowing, Theunis says there are a few rules to follow when using loans to build wealth. Firstly, you need to understand the difference between good debt and bad debt. Theunis says good debt, for instance, is using a loan to buy a house or a similar asset that will increase in value or assist you to earn more money. “The interest charges are offset by the growth in the asset. Using a loan to fund an education is also considered to be good debt because it is an accepted fact that the better educated you are, the more earning potential you have,” he says.
SAFETY NET
Another smart use of credit is to use it to help you with shortfalls in your budget, rather than to dip into your retirement funds. “Many South Africans do not have a safety net in their budgets and when a financial crisis hits, they have no choice but to cash in critical retirement savings. By keeping lines of credit free, people are able to use credit rather than raid their savings,” he notes. Investing in a business can also be a smart use of credit, as long as you have a well-conceived and sustainable business plan. “If your business does well, it will end up being worth far more than the loan you originally took out to finance the business,” he says.
LOANS CAN BOOST YOUR WEALTH
Head of consumer education at FNB, Eunice Sibiya, says there are many different types of loans but they all have one thing in common – which is that they need to be paid back over a certain period with interest. Thus, it is important that you borrow only what you need. Every loan you take out comes with a financial responsibility so you need to make sure you are borrowing for the right reasons. “You shouldn’t be spending too much of your monthly salary on covering monthly loan repayments, remember you must still pay for your living expenses,” says Eunice. Theunis adds, “Credit can be a valuable wealth-enhancing tool when you use it wisely. If you need help to ensure that you are using the appropriate loans for your purchases, speak to a bank consultant. They can help you put together the right combination of products for your needs.”
