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Introduction
In an ideal world you would never have to borrow money. No one enjoys being indebted to another person or company, but for the majority of people borrowing in some form is necessary, so the important thing is to keep abreast of your finances and always know what you are committing yourself to when you sign on the dotted line.
Justmoney.co.za is here to help you find the best financial products for your needs, from credit cards to home loans, but before doing so you should read this guide to get an idea of how you can find the best form of borrowing to suit your needs.
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Forms of borrowing
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When you borrow money you make a commitment to paying it back over time. The period over which you will pay off your debt will depend on how much money you borrow and what for, and of course the agreement with your lender.
Short/mid term borrowing – the main types of borrowing you may choose to use are short and mid-term loans, such as personal loans (also known as short-term loans), credit cards, bank overdrafts, vehicle finance, store cards and in-store finance, which is sometimes referred to as hire-purchase or a credit agreement.
Long- term borrowing – there are fewer types of long-term borrowing, but they include long-term personal loans and mortgages, also known as home loans and bonds. Debt consolidation is another long-term option because this is usually a form of mortgage that is secured on a property.
Other forms of long-term borrowing in other parts of the world include second charge loans or secured loans, which are again loans secured against a property. Also growing in popularity in South Africa are equity release mortgages, designed for older people. Visit the Justmoney.co.za equity release page for more information.
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Know what type of borrowing is right for your needs
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If you only want to borrow a small amount of money for a short period of time then there is no need to get yourself a large personal loan. Conversely, if you need to borrow a large sum of money and will not be able to pay it back quickly, then you should steer clear of just piling up debt on credit cards. It is important to use the right form of borrowing for your circumstances, otherwise you may find yourself in a far worse position than need be.
Overdrafts – having an overdraft facility on your bank account is a fairly safe and practical form of day-to-day small sum borrowing. The maximum that you can borrow is negotiable with your bank, but will not exceed your monthly income, so it is hard to get yourself into very serious debt trouble. The interest rate on an overdraft will be quite high, although this is negotiable with your bank, so this means that it is best to only use your overdraft if you need to, and to try and pay it off quickly rather than letting the debt and interest build up.
Tip – You should only have an overdraft as an ‘emergency’ buffer for when you occasionally need more money that you have available in your bank account because it is an expensive form of borrowing.
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Credit Cards – a credit card provides a similar means of borrowing to an overdraft facility, but you can borrow more and at slightly better interest rates. You should consider using a credit card if you want to borrow a small to medium amount of money, no more than a few thousand Rand, and intend to pay it off quite quickly. This may be useful if there are things you need to buy and cannot afford it at the time, but know that you will have the money soon enough. For example you may want to use a credit card to help pay for a large item such as furniture or electrical goods, knowing that you will be able to pay off the credit card debt in three or four months. If you need a credit card you should aim to get one with an interest rate of around 20%, though some charge as high as 30%, whilst others charge lower interest rates of 18%.
Check out the Justmoney.co.za credit card page comparison calculator for more information.
Tip – Avoid store cards as you will pay a high interest rate. Either pay with cash or a debit card, or, if you must pay on credit, get a credit card with a lower interest rate.
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Store Cards – a store card is a bit like a credit card, but it is offered by a particular store or retailer and may be a useful means of borrowing if you are purchasing expensive items from a particular shop. Also, a retailer will often offer an incentive of discounts or savings on purchases to persuade you to apply for a store card. However, it will in most cases charge a higher rate than a normal credit card or even buying something on hire-purchase, so you should think carefully before getting one of these cards. But remember that the interest rate will probably be the most important consideration rather than the rewards you can get from the store, and it is tempting to carry on buying, so you will be saddled with a lot of expensive debt on your store card.
Tip – You should only have an overdraft as an ‘emergency’ buffer for when you occasionally need more money that you have available in your bank account because it is an expensive form of borrowing.
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In-store finance – some stores offer finance agreements to help you buy furniture and other items you may want for your house. These will be mid-term credit agreements and may be a good idea if you want to enjoy the quality of life your new salary offers but do not have the capital to do so right away. If you know that you will not be able to pay off a purchase debt very quickly then it is more sensible to use an option like this to borrow rather than a credit card, but be aware that this in not just a short term commitment. You may be paying instalments for many months or even years, so do not only look at the interest rate, but also the period of borrowing.
Tip – In-store finance can be confusing and some stores try and give you a micro-loan (which is usually more expensive) instead of real hire purchase. As with any purchase, it is better to save up the cash instead of getting it on credit. However, if you must use credit get a quote for a personal loan and compare the repayments with what the store is quoting to see which is cheaper.
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Short-term to mid-term personal loans – if you need to borrow significant sums of money but want to pay it off in the short term then this may be a better option for you rather than amassing lots of smaller debts in different places such as overdrafts, credit cards and in-store finance. You can usually borrow up to R30,000 with an unsecured personal loan, but the interest rate can be as high as 42% depending on your personal circumstances and your credit history. If you have a poor credit record, with arrears in the past, you could end up paying a lot of money in interest. Unsecured borrowing means that the lender does not have the security of an asset, such as your home or your vehicle, which they could possibly repossess if you do not make your repayments.
Tip – Only get a personal loan if you know you can make the repayments. If you are looking at a personal loan because you are struggling to pay off other debts, then debt consolidation or debt management might be more suitable.
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Vehicle finance – if you want to buy a car, whether new or second hand, but do not have the funds available at the time then lots of lenders from banks to car dealers will be happy to offer you vehicle finance. This is a mid-term commitment paid off over several years. Vehicle finance allows you to enjoy the use of a car you cannot currently afford, but you will end up paying a lot of money for this benefit in interest instalments and if you don’t keep up the repayments your car will be repossessed.
Tip – If you are buying a car from a dealer who is offering you finance, get a vehicle loan quote from your own bank and another lender to compare costs and see which is cheaper. Some dealers suggest that getting finance from them is obligatory, but this is not true.
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Home loans and long-term borrowing – these are essentially the same, since if you want to borrow large sums of money over long periods then you will have to secure it against an asset; your home in most cases. You may already own a house and wish to unlock the capital in your asset so that you can enjoy a higher standard of living, or you may be a first time buyer looking to get on the property ladder and as most people are not fortunate enough to be able to pay for a house outright, a home loan is the only option. Home loans offer the best interest rates of all forms of borrowing (usually around prime -2%) because they are relatively risk free from the lender’s perspective. However, this does not mean that they are risk free from the consumer’s point of view; you need a secure job and good management of your finances to ensure that you can always make your monthly instalments.
Tip – Use a broker to shop around for a home loan; don’t just go to your bank or a mortgage originator as they won’t have a wide enough choice of lenders and may not be able to secure you the best price.
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Debt consolidation – if you do find yourself in a position where you have lots of debts in different places then things can quite easily get out of control. You will have a number of monthly repayments to keep up with and will probably be paying far higher interest rates than you need to. By consolidating all these debts into your home loan then you will not only benefit from simplified debt, but also a far lower interest rate. For debt consolidation to be a possibility, the value of your home must exceed the value of your current home loan. The difference between these two values is known as “equity” and it is this amount that you are borrowing against when you take out an equity release loan. However, you still need to prove that you can make the repayments on the bigger loan.
Tip – Although debt consolidation is a good way of reducing your monthly debt repayments, because it is part of a mortgage that is paid off over ten, 15 or 20 years, you could end up paying more in total. Therefore, if you can afford it, you should pay as much into your mortgage as possible and pay off your mortgage quickly, potentially save yourself hundreds of thousands of Rands.
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Debt management – debt management is not actually a loan, but is a system designed to help people struggling to pay their debts. It was introduced as part of the National Credit Act (NCA) to enable people to put their debt under review via a qualified debt counsellor who will then negotiate with a person’s credit providers and put together a repayment plan. Via the plan, a person promises to pay back part or all the money they owe, but at a fixed, affordable monthly amount. One of the vital elements of debt management is that the consumer is then not allowed to take out any more loans or credit agreements.
Tip – Don’t wait too long if you are struggling to pay off your debts and don’t try and get another loan if you are already struggling with repayments or to find cash. Seek advice from a debt counsellor, such as Justmoney.co.za’s partner, DebtBusters.
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Be informed when you borrow
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If you decide to borrow money then you need to know your rights and your commitments.
The National Credit Act – the NCA was set up to help and protect consumers who enter into credit agreements with lenders. It regulates all lending institutions and aims to promote the development of an accessible credit market. One of the ways it does this is by setting maximum fees and credit rates that lenders can charge. Before you enter into a credit agreement you should know what these maximums are but by no means settle for them as by negotiating and shopping around you should be able to pay less. For more information use the Justmoney.co.za Guides and Tools and read “your guide to the National Credit Act” and “your guide to rates and fees”.
Your credit record – under The Act lenders are now required to be more thorough in their assessment of an individual’s capacity for debt. This protects consumers from entering into agreements that they will not realistically be able to cope with and stops lenders from being so prolific. However, it also means that it is very important to keep a good credit record. The National Credit Register is a database of credit records that lenders use to assess whether or not an individual can afford to take on a debt, so unless you keep a clear record you will find it hard to borrow money. For more information use the Justmoney.co.za Guides and Tools and read “your guide to the National Credit Act”.
Debt councillors – if an individual is struggling to make debt repayments then he or she may be referred to a debt counsellor, and as a result of which the debt may get restructured so that it is more affordable. However, having to see a debt councillor will seriously affect an individual’s credit record and the ease of borrowing in the future. For more information use the Justmoney.co.za Guides and Tools and read “your guide to the National Credit Act”.
Be sensible with debt – debt can spiral out of control very quickly and you may at some time feel like things are getting out of hand. However, if you manage your finances carefully, seek help if you do get into trouble and follow the basic rule of never borrowing more than you can afford then you should be able to keep out of trouble.
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