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Can I take a R100k loan while still in debt?

Sep 13 2016 07:50
Liziwe Ndalana

A Fin24 user wants to know if it is the right time to take out a loan, given that the economy is not in its best form at present.

He writes: "I currently earn R9 000 per month and my debt repayments are R3 500 per month. I was going to take out an R100k loan next year and build a house, and maybe get a second hand car. Is it advisable to go into debt with our economy and can I afford this loan, given my current situation? Please advise."

Wikus Olivier of Debt Safe answers:

Your debt to income ratio is currently at 38% considering that R9 000 is your net take home pay. If it is not, then your ratio will be above 40% as things currently stand.

A good rule to follow is to never allow your debt repayments to be more than 40% of your disposable income.

In general, over indebted South Africans have a debt to disposable income ratio of more than 70%. Debt repayments chew up their whole income and prohibit them from saving or ever having a positive cash balance in their bank accounts.

This in turn causes more debt as people borrow even more to service existing debt. You are currently right there where best practices say is the threshold. Taking on more debt would push you over the threshold, putting you in a position where becoming over indebted can happen very easily.

My advice would be to first get rid of your existing debt. Once that is done, take out a home loan to build a house. Do not take out a personal loan to build a house. So many people have fallen into that trap.

Personal loans are very expensive compared to home loans, just considering the interest rate alone.

ALSO READ: Young South Africans flock to payday loans

On a personal loan you could easily be looking at a 25% interest rate, whereas with a home loan your interest rate will be closer to prime at around 10%. Don’t be in a hurry.

It is better to rent and be debt free as compared to having a house which you cannot afford and running the risk of losing it because you cannot honour the payments."

ALSO READ: Avoid working just to pay debts

*Do you have a pressing financial question? Post it on our Money Clinic section and we will get an expert to answer your query.

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