As the cost of living continues to skyrocket, many of us are forced to borrow money, whether it’s for a deposit on the flat you want to rent or whether you are trying to survive until pay-day, we are all a bit strapped for cash at some point. This column begs the question: what are the different options and how do you go about applying for finance?
Thanks to the wonderful world of technology, some loan companies now allow for a simple online application process which uses your ID number as a way of determining some of your credit information - checking for things like defaulted payments or, heaven forbid, judgements against your name. If all is well in terms of your credit score, the required documents are e-mailed to you, you print them out and fax them through to the lender and the process is completed once the credit provider is 100% sure that you can afford it – the myriad of lending legislation is checked by law. Typically, the money is usually available in your bank account within a couple of days, but while these sorts of loans are convenient, it is important to remember that the interest you pay on these loans can be quite costly and you will end up paying a lot more than what you originally borrow.
South Africa has one of the strictest lending policies in the world and the National Credit Act or the NCA is there to help protect consumers who get into credit agreements with lenders. There is a regulator which sets the maximum fees and credit rates lenders can charge, so before you sign a credit agreement all these rates and fees should be made available to you. If you are not happy with the rates and fees provided to you by a certain lender, shop around! There are better deals out there and you don’t have to settle for what is first offered to you.
Before you even consider borrowing money it is important that you make sure you can genuinely afford it. This doesn’t only mean knowing that you can pay back what is owed now, but would you be able to continue to make these payments if you were to have your salary cut by 10%. When drawing up your budget make sure that the estimated monthly repayment is affordable and that you still have some room to breathe in case of unforeseen eventualities- see how much you’ll be left with and ask yourself if you can sustain yourself on that amount.
This is where the NCA plays yet another vital role – registered credit providers have to run credit checks on each of their prospective clients in order to determine their monthly expense commitments – you might be default and judgement free, but if you have too many other debts to pay off, you’re unlikely to qualify for further credit.
“Affordability will vary from credit provider to credit provider and the type of loan that is being taken out. For instance, a home loan will not be granted if more than 30 or 35% of the household income. Personal loans and credit cards would be easier, but the affordability calculation is not standardised,” Luke Hirst MD of DebtBusters said.
It is imperative to be honest to your credit providers with regards your affordability and disclose all other debt obligations to them. Your credit provider will also consult credit bureaus to see if you have any other debts and how much they amount to so there is no point in lying about this information. You could be listed as a responsible borrower, a credit risk or a slow payer – all depending on how you have handled previous repayments.
“Develop a plan. Budgeting is never enjoyable, but it’s the only way to get an idea of how much money you have coming in, where your money is going to, and how much you’ll need monthly to pay off your debt by a certain date.’
“If you can continue to pay all your monthly debt repayments and have money left over, then pay the highest interest first,” Hirst said.
That means paying off credit cards before vehicle finance and vehicle finance before your house but you should never, ever skip on a payment – especially not the big ones. Bear in mind that some financial institutions are open to negotiation provided you make them aware of your situations well in advance and you arrange for a date that you do plan on making a payment. There are even some home loan options that will allow you to ‘skip a payment’ here and there over the course of a twenty year repayment.
While some forms of debt can be handy and are almost unavoidable for some, debt can be a never-ending rabbit hole and there’s no Mad Hatter and March Hare to help you out of it.
“The more credit you take out, the less disposable income you will have. If, after deducting living expenses from your net salary, you have less cash left over than the instalments on your total debt, you should apply for counselling” says Hirst.
DebtBusters are focussed on helping those who are stuck in the rabbit hole and Hirst says that they’d like to get consumers to approach them earlier in the cycle so that they can offer them more options and get them out of debt far quicker.
In some cases, leaving an application for debt review by a few months can mean a year added onto their repayment period as interest and charges build up.
If you are struggling with debt and you are looking for a way to reduce your payments into one, consulting a debt advisor is your best bet – but that’s another topic for another post…
If you’re interested in getting more information, please don’t hesitate to ask an expert!
This post was first written by Justmoney.co.za for Imod.co.za
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