“Your giant, your obstacle, your problem is a gateway to your significance and promotion”Rick Godwin
There are two kinds of people, those who earn interest and others who pay it, unfortunately those who pay it, do not understand the value of it, because they are ignorant”Albert Einstein
My description of Debt can be briefly broken down as “squeezing, draining your wealth; stealing from yourself, from your future (sacrificial lamb) and that of your loved ones” just by making a few second’s quick decision today, for a short term gain, so tread carefully before taking on debt.
Do you know how much it costs to borrow money from a financial institution, furthermore how much it costs you to maintain the debt for the period specified especially when interest rates increases? “There are two kinds of people, those who earn interest and others who pay it, unfortunately, those who pay it, do not understand the value of it, because they are ignorant” Are you also aware that debt steals away from you and your family’s future.
Debt is an agreement(arrangement) contract entered into by a consumer and financial institutions such as banks or microlenders in order for the consumer to receive funds that must be repaid within a stipulated date, which is usually accompanied by a charge(initiation fee, administration fee, interest-free). These paybacks are arranged via debit order (bank account), cash payment, salary deduction.
Understanding the Types of Debt
Secured debt: it is where the creditor guarantees that the asset will be paid back unless you use an asset you own as a guarantee called alien; if the consumer does not pay, then the creditor can take the asset away.
Unsecured debt: this is where the consumer takes out credit by simply giving an oath(promise) or word that the consumer will pay back what has been lent out by the creditor.
Healthy debt: The keyword is AFFORDABILITY, so that if the consumer can afford and pay it and where it can enhance(improve) one’s situation(financial or life) then it is healthy debt, e.g. education loan to study further, home loan (asset increase in value and also provide shelter).
Unhealthy debt: this is the debt that is taken to worsen the financial situation or live beyond one’s means or so negative that the consumer cannot pay it and it lowers credit score or when the consumer borrows from the unregistered unregulated microlenders who charge a large amount of interest.
Be aware before one takes on or out debt shop around that one does a comparison among financial institutions to see who charges more or less interest(cost) in line with one’s needs for the loan(credit). Most of these institutions have a loan calculator.
Be careful again to stick to the amount you need and not be tempted by loan consultants who want to sell you more than what one needs, as it has an effect on your repayment of that loan and interest implications.
Take to heart the cost to maintain that debt for the period specified, as you imagine interest rates(cost) go up and down, so if it goes up will the consumer be able to keep up(maintain) the repayments.
Before taking up that credit card or personal loan, have you exhausted all avenues(researched the meeting of your needs), for example, can the consumer not perhaps delay the purchase or save and buy later or use own savings to purchase the items, as this may save the consumer exorbitant interest rates, so taking out a loan should be the last resort. Nowadays, we also have a Lay- By where one pays a 10% deposit of the original amount and pay the remainder by installments until paid in full; the good news is that it does not attract any interest and this was used by our grandparents (ancestors) who did not earn so much money at the time and they survived and they neither in debt nor were over-indebted; they were very disciplined and fearful of debt.
Do you understand what and how much it costs you to borrow (do the calculations on personal loans, overdraft, car..)
On successful application, a lender or credit provider will grant you credit or a loan which must be paid back over the period of time agreed upon and with interest for holding that money in use.
Always choose a loan repayment(installment) that suits you and your pocket(affordability), your needs, and choose a period that will suit your financial situation. Bearing in mind that the monthly repayments will have statutory value on them such as a compulsory R57.00 administration fee, credit life which varies from various financial institutions, and the size of the debt and initiation fee or R1100. Please note that these charges may have changed since they were applicable at the time of writing this article.
Let us use a table as an example to explain how it works and this depends on your credit profile, prevailing rates, and personal circumstances.
How much does a loan actually cost you? Let us take an R4000,00 loan.
Total repayments over 2 years (24 months) = R285 per month X 24 = R6 840.
Total interest over 2 years = R2840 (R6840 – R4000)
Total repayments over 3 years(36 months) = R223 per month X 36 = R8 028.
Total interest over 3 years = R4028 (R8028 – R4000)
Total repayments over 5 years(60 months) = R1173 per month X 60 = R10 380
Total interest over 5 years = R 6380 (R10380 – R4000)
Let us look when you take out a R10,000 loan.
Total repayments over 2 years(24 months) = R667 per month X 24 = R16 008.
Total interest over 2 years = R6008(R16,008 – R10,000)
Total repayments over 3 years (36 months) = R510 per month X 36 = R18,360.
Total interest over 3 years = R8360(R18,360 – R10,000)
Total repayments over 5 years (60 months) = R387 per month X 60 = R23,220
Total interest over 5 years (60 months) = R13,220(R23,220 – R10,000)
If you borrowed R25,000 loan, what would it cost you
Total repayments over 2 years(24 months) = R1580 per month X 24 = R37,920.
Total interest over 2 years = R12,920 (R37,920 – R25,000)
Total repayments over 3 years (36 months) = R1272 per month X 36 = R45,792.
Total interest over 3 years = R20,792 (R45, 792 – R 25,000)
Total repayments over 5 years(60 months) = R873 per month X 60 =R52,380
Total interest over 5 years = R27380 (R52, 380 – R25,000)
What do you notice:
When you calculate the total interest charged, a picture begins to emerge where it becomes clear how much interest is being charged.
It is clear from this table that it is better to repay loans over a shorter period and although the monthly installments seem cheaper if you take out a loan over a longer period; the total amount paid is more than twice the amount of loan initially taken out.
The lender does not specify the interest rate; if they had told you, you would not have taken out the loan in the first place or you would have to think it over(sleep over it thus delaying in taking out the loan); so they are kind of hoping that you will remain ignorant and not do the calculations – Please be warned, read the fine(small) print as it never states the actual rates used and it all depends on your personal circumstances.
There is always a warning that the rates are subject to change, so you may find yourself paying higher monthly installments if rates were to increase without you knowing.
There are also other costs to consider such as initiation fee, administration fee, credit life insurance (e.g. short term insurance on a car purchase price) which may be low, but over time may add up, which will definitely increase the size of the loan you originally negotiated.
The National Credit Regulator (NCR) came into effect back in June 2007 to put in place:
Rules and regulations for consumers and credit providers
Credit Providers requests credit agencies such as credit bureaus for a consumer’s credit report so that they can offer credit based on the consumer’s valid, accurate and correct credit historical behavior as reflected on the credit report (it is also the consumer’s primary responsibility to ensure that their own credit records are accurate and valid). Read the chapter on Understanding & protecting your credit score (credit rating)
The Act also limits credit providers from offering loans/credit that the consumer cannot afford(reckless lending)
The Act also sets limits on the interest rates the credit providers can charge consumers so that consumers can be protected and avoid being taken advantage of.