Personal loans: handle with care
Personal loans are tempting. All it takes is one phone call and ka-ching, there is money is in your account. Lots of lovely lolly for you to spend on whatever your heart desires. But it is not that simple, is it? Consider that the average South African spends 75% of their take home pay on debt repayments with more and more people defaulting on their payments every month. Find out how you can avoid becoming another statistic with this advice from The Money School's Gary Kayle.
Can you really afford the loan?
Work out if you can really afford the loan before you contact a credit provider. Carefully consider how much money you have available in your budget after expenses to make your monthly repayments. Make sure that the expenses listed in your budget are realistic and regularly updated think about tracking your expenses for a few months if you are not sure how much you spend on food, petrol etc.
When calculating affordability you have to think ahead. Are your expenses going to increase in the next year or two? Is your child starting school next year, for example?
Remember that a healthy budget includes retirement savings, regular contributions to an emergency fund and an amount for unexpected monthly expenses.
Beware of unscrupulous salesmen who will encourage you to understate your monthly expenses to ensure that you quality for the loan and that he/she earns commission!
How much are you actually borrowing?
Before you sign on the proverbial dotted line be sure to work out what your total repayments will be, including interest and administration fees. Did you know that providers charge compound interest on personal loans, which means that you pay interest not only on the amount you originally borrowed but on the interest that you accrue as well.
A R10 000 loan taken over a period of two years at an interest rate of 25% could end up costing you R15 000! Is the idea of cash in a flash starting to sound less and less desirable?
- It is worth taking the time to shop around for the cheapest loan as different providers will charge you different interest rates and admin fees.
- Make sure that your provider is NCR accredited. Find out more on their website.
- Ask your provider if you will incur penalties if you want to pay the loan off sooner
In an ideal world we would not need personal loans but sometimes we simply have to take advantage of the credit on offer. Stick to the guidelines above and you will stay out of hot water. Remember that ideally you should have an emergency fund available to deal with unforeseen expenses. And, if you are taking a loan to buy a new couch or sound system, you are much better off saving towards your purchases. Never forget these wise words: if you cannot afford to save for it you cannot afford to borrow for it!
About The Money School
The Money School equips individuals, couples and even their kids with financial education courses, workshops and tools that are geared at non-financial people who simply want to take charge of their financial lives. Like us on facebook @themoneyschoolsa or follow us on twitter @moneyschoolsa.