Blergh, credit, boring! Wrong! Knowing about credit and debit and more importantly knowing how to effectively manage the two is a skill that will help you more than you know once you start earning money.
To make sure we’re all on the same page, we’ve included a glossary of terms that you’ll find in most instances of loaning money.
CREDIT: Money made available to you by an authorised financial services provider.
DEBT: Money that you owe a person or company
INTEREST RATE: Usually expressed as a percentage, this is the cost that will be payable for the loan.
PRIME: The interest rate most banks use.
UNSECURED LENDING/LOAN: Unlike a secured loan, no collateral is required. The lender relies solely on your promise to pay. This type of loan used to be given out by “loan sharks” although that term as been phased out. Most micro loans (lending amounts between R500 and R3000) make use of the unsecured lending model.
SECURED LENDING/LOAN: A secured loan requires you to put down some sort of collateral in case you don’t or can’t pay back the loan.
Before we begin explaining the ins and outs of lending, let’s just make one thing very clear. Credit, whether from a credit card or another source is not free money. The interest rates associated with credit cards and unsecured lending can usually be as little as 10% but can be as high as 400% . What does that mean? Well, if you were to lend R1000 at an interest rate of 444% per annum (which is the average interest rate when lending from South African micro loan companies) over 30 days you can expect to pay a total of R1,370 just on the cash alone. Factor in administration fees and other costs and you could end up paying as much as R1500 on you R1000 loan! When you apply for credit you need to make sure that you are very honest about your financial situation because if you aren’t, you could land yourself in more trouble than just debt.
So shouldn’t I lend money then?
The ideal answer is yes, do not lend money. Unfortunately in the current global financial market this is much easier said than done. For most of you reading this you are about to experience your first taste of money lending in the form of student loans.
They come in two variants, you can either pay off the interest and the loan at the same time or you can pay off the interest over the course of the loan period and then pay off the original loan amount in one payment. Both of these options have their pros and cons. If you choose option one, you’ll be working a lot, having to maintain your studies, as well as a job to pay back the loan. The other option would allow you a bit more freedom but you would need to make sure that you can pay off the loan once the term is over. The best idea with both of these options is to take the loan for a longer period than what you need it for. This will result in a higher interest rate payable but you have a bit of a safety net in regards to paying off the loan.
You probably know someone who has a clothing account at a clothing chain. While most forms of debt will usually land you in trouble, having a clothing account can actually help, provided of course that you can pay the account on time. See, while debit is bad, for those instances where it is unavoidable you’ll need a good credit rating to lend money. Confused yet?
See in order for banks and authorized financial services providers to lend you money, they need to make sure that you’ll pay back the money and this is where clothing accounts are very useful. See, clothing accounts don’t require that you pay back the full amount all at once but rather in instalments (usually a minimum of 15% of the total amount is owed) which makes getting a good credit record a lot easier. Provided of course you pay them on time it’s important to remember that if you don’t you may be listed as a “slow payer” by the credit bureau which negatively affects your credit rating.
Cars are expensive. Chances are that you’ll probably have a second hand car as your first car but even then you may need to apply for finance. As a teenager right out of high school you probably won’t be the one buying the car and will more often than not, be registered on one of your parents’ names. This doesn’t mean we can’t drop some “A grade” knowledge your way. Car finance is a bit of a tricky situation to dissect so we’ll give you a general overview. Generally when looking to purchase a car that’s selling at R100 000, you’ll need to be earning a minimum of R9000 a month with at least R4000 left after your expenses so that you can make a monthly payment of R1000. While this seems silly it isn’t. A while back people would apply for finance where they would need to make a monthly car payment of R9000 with a R9000 salary. This means that your entire salary goes into paying of a car, no money for insurance, petrol or maintenance. So when you decide to get a new car remember to keep all those factors in mind. Insurance for a new driver comes in at around R1200 per month, your petrol expenses will need to be accounted for as well and don’t forget those services and any unexpected breakdowns. So in reality, if you want to buy a new car through finance, realistically you need to be earning R12000.
There is also a funny little thing called a “balloon payment”. A balloon payment is a way that financiers get you a discount on your monthly repayment but this discount gets added up at the end of the term and then charged to you in a lump sum. So for example, if you take finance out on a car that’s R100 000 with a balloon payment for 10% you’ll need to make a payment of R10 000 at the end of the term. This usually involves you having to trade in your vehicle for another one. It can become a dangerous cycle where you’re buying a new car every 5 years so just be careful when signing those papers.
Your parents will tell you that investing in property is the best thing you can ever do because property never decreases in value. While in general this is true, that statement is largely based on location of the property. Home loans or bonds as they’re known in South Africa are the biggest cause of debt amongst South Africans. Bonds are an easy way to be able to afford a house without having to save for years and years. So what do you need to know about home loans? First things first, you need to save for a deposit. Your deposit will more than likely be 10% of the value of the property and contributes to the payment of the bond.
Now when you apply you’ll get a certain percentage bond. This percentage is the amount of that the bank is willing to pay for the house (of course you will need to pay them back) on your behalf. Most first time home buyers get a 100% bond depending on your credit history. If you get a 100% bond that’s fantastic because that means you won’t have to pay a large chunk of the bond immediately. Because of the high cost of property the process of getting a home loan and applying for a bond is very complex and very long. Then once everything has been approved and the bank says they’ll buy the house for you as long as you pay them back, the process of getting your name as the tittle owner is even longer.
There are of course other costs associated with a home loan including lawyer fees, surveyor fees, bank charges and a host of cost factors. This is so that the process is legal and protects both yourself and the bank. The other thing you need to decide on is whether you want a variable or fixed interest rate which we won’t get into that too much.
A variable interest rate means that interest on your bond will change year on year and a fixed interest is based on the year where you took the home loan. Home loans usually have a term of 20 years but it can be longer if you need it to be. The reason why when buying property with a bond is so popular, is this; once you have the bond you can lend from it without having to apply for credit again, provided your contract allows it, you can take money out of your bond to use on other things. Bear in mind that this is not advisable as it will lengthen your repayment term but if you have an emergency, then having a bond you make use of is quite a nifty convenience.
Credit cards or as they’re popularly known, plastic money, are great for emergencies but a burden when used improperly. Before we explain how they work we need to make something very clear. The money on a credit card is not yours, it is not free and you will have to pay it back.
Credit cards are issued by banks or registered financial credit providers to qualifying clients. They are relatively easy to get hold of and the credit limit can be increased over time but we wouldn’t suggest you do this if you are not the type of person where money burns a hole in your pocket.
While temptation to charge everything to your credit card is massive, try to keep this bit of advice in mind when ever faced with the choice of saving money or buying something with a credit card, will you still be using it by the time the credit is paid off? If the answer is no, move along and start saving.
These are just some of the examples of credit and debt, we know we left out cell phone contracts and rent to own services but this is just to give you an idea of what the most common ways of accumulating debt and choosing credit. Keep a clear credit history at all times and always know you’re being seen by financial service providers.
Wow what was a LOT of information. Here is a picture of a cute cat, that should cheer every one up 😉