The emergence of COVID-19 has dramatically changed our lives. The financial impact has been sweeping and has resulted in massive job losses, business closures and salary cuts.
According to DebtBusters, one of the leading debt counselling companies in South Africa, these circumstances have forced consumers to take on unsecured debt to supplement their income.
However, unsecured debt is not a bad thing if used responsibly. We spoke to an FNB spokesperson for tips on how to make the most of this form of debt.
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What is unsecured debt?
Unsecured debt refers to any loan that is not backed by collateral. If you don’t pay your debt, the lender will not be able to recover their funds, because you haven’t pledged an asset that they can sell in the event that you default. Unsecured debt refers to most personal loans, credit cards, overdrafts, and student loans.
Why take up unsecured debt?
According to Emma Mer, CEO of FNB Loans, unsecured debt can enable consumers to achieve financial goals that would otherwise be out of their reach. “If you look at examples like educating a child or renovating a home, we often can’t do that without the help of credit,” says Mer.
“As long as credit is used in a responsible way and for the right purpose, it can help to better the lives of South Africans.”
Mer says that consumers are attracted to unsecured debt because it’s easy to access. The loan approval process is relatively simple because the lender doesn’t have to do an asset evaluation.
In addition, loan terms are often shorter. You can take as little as 3 months to repay a personal loan, depending on the lender and your credit score.
Disadvantages of unsecured debt
High interest rates are one of the main downsides of unsecured debt. “Where the debt is unsecured, there’s a higher level of risk that the lender takes on to lend that money to the individual,” Mer explains.
Extended loan repayment periods are another pitfall that consumers may struggle to avoid. Longer terms mean lower monthly instalments, but the total repayment amount tends to be high.
Mer says you can secure preferential rates in future if you pay your debt on time. Lenders look at your transactional behaviour and if you’ve been a loyal client and never miss your payments, they will reduce your interest rates.
Tips on how to use unsecured debt responsibly
Mer offers the following advice to any consumer considering taking on unsecured debt.
- Avoid taking a personal loan to pay for luxuries
- Avoid using credit cards for unnecessary purchases
- Don’t take more credit than you need
- Make sure you keep up with your monthly repayments
According to Mer, failing to follow the tips above could impair your credit record, and jeopardise your chances of getting credit in future.
“Even if you’re able to borrow, a poor credit record might affect the size of the loan or the interest rate you are offered,” says Mer.
These additional tips can also ensure you don’t get trapped in the debt cycle:
- Revise your monthly expenses
- Use budgeting tools, and stick to your monthly budget
- Consolidate your debt
- Free up cash and pay off your most expensive debt first
- Use reward programmes to make your money go further
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