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 the pros and cons of each.
In this article, JustMoney spoke to Ayanda Ndimande, business development manager of retail credit at Sanlam to help unpack the benefits and drawbacks that each method presents.
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1. Personal loans
One of the most popular ways of borrowing money is personal loans. They’re easily accessible to people with a good credit score.
According to Ndimande, a personal loan generates good credit if it is 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 says a personal loan can help consolidate debt into one more affordable monthly payment, possibly with lower fees and interest rates.
Be careful though, Ndimande says, as personal loans tend to have higher interest rates. Some loans are also not based on affordability, which results in overexposure of debt and inability to pay it back.
2. Home loans
According to Ndimande, because it helps you buy property, a home loan increases your net worth and helps 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 is 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 too 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 for small amounts. The downside is that their interest can be very high, and they include 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.
READ MORE: What are payday loans?
5. Hire Purchase
According to Ndimande, a hire purchase, which is also known as an instalment plan, can help you if you don’t have a lot of cash immediately and you urgently need an asset. Interest rates are lower compared to personal loans because a hire 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.
READ MORE: What is a balloon payment?
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