The process of attaining credit has become easier and faster. Although receiving cash on the same day as applying may excite potential borrowers, it doesn’t come without serious repercussions if you’re not wise.
We should never become complacent in signing a credit agreement, since the terms and conditions, if not read and understood, could result in financial pitfalls. Remember, once you sign on the dotted line, you have agreed with the repayments, the interest rate, the term of the loan, and any other stipulations – and these are binding.
IDM Group expert, Pieter Wasserfall, noted five things to consider before taking on further credit.
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Distinguishing between a ‘need’ and ‘want’
Before making the decision to apply for credit, it is crucial to review your reasons. If you need to urgently pay a medical bill, make a business purchase that may generate income, or even make a payment towards funding your studies or paying school fees, credit may be unavoidable. However, if your expense relates to entertainment, it may be a wise decision to reconsider.
Understanding credit types
Before making the decision to apply for credit, it’s crucial to review your reasons. If you need to urgently pay a medical bill, make a business purchase that may generate income, or even make a payment towards funding studies or school fees, credit may be unavoidable. However, if your expense relates to entertainment, it may be wise to reconsider.
The fine print
Pay particular attention to the interest rate, service and admin fees, and any additional costs that may be hidden at first. Ensure that your monthly instalment is inclusive of all charges so that you are not paying more than you planned to, and you’re not left with any nasty surprises when it’s time to pay.
Affordability
Reputable creditors will conduct an affordability assessment before you are granted the loan, to ensure that you are able to comfortably pay the instalments. However, don’t take for granted that this will happen with your best interests at heart. Your budget should guide you, as only you will know what your affordability bracket is. Just because you have been granted the amount you asked for, do not use all of it unless it’s necessary.
Conduct your own research
Request quotes and compare them to make sure you’re getting the best deal. Desperation can trigger action mode, but with a little bit of patience, you may be saving yourself future costs.
Although time-consuming, proper financial planning and discipline is vital. It could mean paying a lower instalment, and a lower interest rate which could provide you with peace of mind.
Wasserfall says you must be careful not to get trapped in a debt cycle.
“Before you take another loan, it’s important to pay off any existing debt. Many people get entangled in a cycle of debt because they lack credit management skills. They max out their credit cards and borrow for the wrong reasons. Before they know it, they have accumulated more debt than they can afford. If you have to borrow to cover your daily expenses, know that you could be overindebted, in which case you should seek professional help.”
Wasserfall advises that you could also consider consolidating your debt for better management.
“Consolidating your debt will reduce the risk of falling behind with payments. In addition, you’ll pay lower instalments, removing the stress and burden of making multiple payments to different creditors.”
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