There are many ways to obtain credit. It’s up to you to choose which form is suitable for your needs. But before you make that choice, it’s important to weigh up the pros and cons of each.
In this article, we speak with Ayanda Ndimande, business development manager of retail credit at Sanlam, to unpack the benefits and drawbacks that each method presents.
The pros and cons of ways to borrow money
1. Personal loans
One of the most popular ways to borrow money is a personal loan. This form of credit is easily accessible to people with a good credit score.
According to Ndimande, a personal loan can be favourable if it's managed well, and is from a reputable credit provider.
“A personal loan can pay off education, buy an asset to grow a business, or help renovate a house, which can increase the house value,” says Ndimande.
She notes that a personal loan can help consolidate debt into a single, more affordable monthly payment, possibly with lower fees and interest rates.
Ndimande cautions however that personal loans tend to attract higher interest rates. Some loans are also not based on affordability, which results in overexposure to debt and inability to pay it back.
2. Home loans
According to Ndimande, a home loan can increase your net worth and help you generate value.
“Home loans finance the biggest asset an average person will ever own,” says Ndimande.
She says home loans look great on your credit report if you pay consistently every month. However, they also have a downside.
“If you take the maximum time to pay it off, you can end up paying a lot of interest on the loan. Try to pay it off sooner than the maximum number of years you have.”
Should the property be uninsured, or if you don’t have life insurance that can pay off the property if you pass away, this would be an issue for your dependents, she adds.
3. Credit Cards
Ndimande says a credit card can be considered "good debt" if used responsibly - that is, only for emergencies, and if you settle your instalments every month.
“A credit card is good if it's used for needs and not wants. Try as much as possible to use your emergency savings instead of credit,” says Ndimande.
The problem with this type of loan is that it’s easy to rack up debt. Some people only pay the minimum amount and then max out their card again.
“If you max your card out, you won’t have anything left for emergencies,” says Ndimande. You’ll also end up paying a good deal of unnecessary interest.
4. Payday loans
Ndimande says payday loans provide instant financial relief and they are usually small amounts. The downside is that their interest can be very high, and they attract administration fees.
According to Ndimande, payday loans are not sustainable, as people tend to borrow month to month.
“If you’re already in debt and are struggling financially, this will be an added expense. We strongly caution against these loans because consumers can become easily entrapped within a cycle of borrowing every month,” says Ndimande.
5. Hire Purchase
According to Ndimande, hire purchase, which is also known as an instalment plan, can help you if you don’t have a lot of cash available and you urgently need an asset. Interest rates are lower compared to personal loans because purchase is secured.
Beware, however, of choosing a balloon payment as your finance option, as you’ll pay a larger amount at the end of your loan term.
“You’ll end up paying much more than the cost price in this situation,” says Ndimande.
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