THE REAL COST OF TAKING OUT A LOAN

While a loan can bring relief and a way forward when used responsibly, it can spell disaster when used irresponsibly. But when we’re under financial pressure, the idea of a loan is difficult to resist. 

---

Nonetheless, before you take the loan, ask yourself the following questions:

DO I REALLY NEED A LOAN?
Is it to invest in your future? For example, for study fees or starting a small business you’ve thoroughly researched. Or is it for a flat-screen TV or fancy shoes?

Good debt pays for things that provide long-term value or add income; bad debt is usually with impulse or lifestyle-related purchases, says Nozizwe Fakude, head of consumer insights at specialist loans provider DirectAxis.

Settling good debt through a loan has the added advantage of building a good credit profile for the future, provided you consistently pay on time for the full term. Bad debt, especially if you miss payments, can be disastrous and damage your financial future.

ARE THERE ALTERNATIVES?
If you need a small amount to see you through to payday (a ‘payday loan’ under R8 000), and earn a regular salary, explore cheaper options like a salary advance (usually without interest or charges) or a temporary bank overdraft.

Related article: Payday loans: What to watch out for

‘You can also consider your credit card, as most work on a 55-day interest-free basis,’ says certified Cape Town financial planner Gareth Collier, director of Crue Invest. In addition, examine your budget to find ways to cut back.

If you need money to fund your existing debt, or your debt is overwhelming, you’re on a slippery slope that can get steeper if you try to borrow more. Rather explore debt consolidation. It is one big loan that will pay off your smaller debts at a single interest rate. However, make sure you choose a reputable financial institution.

Also, consider debt counselling. ‘Debt counselling also offers protection from creditors; they will often negotiate better interest rates on loans and will work with you to get out of debt,’ Collier says.



WHAT’S THE TRUE COST OF A LOAN?
Ask for the full details on the interest rate, fees, charges and repayment plan, i.e. exactly how much you will need to repay, how often (weekly or monthly) and by when? Can you afford it? What will it amount to by the end of the loan term? How much more will it be compared with if you settled what you owe right now?

Longer-term loans with lower monthly repayments can seem more attractive than shorter-term loans, but because you take longer to clear them, you will end up paying more interest in total, says Collier.

It is essential to understand the difference between fixed and variable-rate loans, says Fakude. ‘Although interest rates on fixed-rate loans are usually higher, they remain the same for the duration of the loan, whether the Reserve Bank ups interest rates or not.’

Related article: How to manage your money when you have a family to support

WHAT’S MY BEST SOURCE FOR A LOAN?
Options are endless, but not all are safe. Informal lenders or ‘mashonisas’, for instance, are individuals who offer loans with minimal difficulty in terms of admin (you often hand over your ID or bank card as security), but usually provide it at very high interest rates. They’re unregulated by law and may lend to you even if you can’t afford to repay the loan. The safest option is a personal loan from a registered credit provider. You can check with the National Credit Regulator. Shop around to find the best provider for you.

It’s always best, if possible, to speak to an independent financial adviser before borrowing. ‘Never be too shy or proud to ask for advice,’ Collier says. ‘Most advisers will be happy to help, and the possible consultation fee could be far less than the interest you pay should you sign up for an inappropriate loan.’

Related article: What is good debt?