It’s no secret that South Africans don’t have a great debt history, says National Debt Advisors.
According to Sebastien Alexanderson, Founder and Debt Advisor at National Debt Advisors (NDA), retail bank FNB recently revealed that credit-active middle-income consumers spend, on average, 30% of their income on unsecured credit and 35% on secured credit.
“To create a debt-savvy future generation, it is therefore essential that young people are educated as early as possible about the long-term dangers of bad debt behavior.
“Unfortunately, the indebtedness of our young people is already on a constant slope. Receiving credit from credit grantors is a fairly easy task and often leads to excess debt if not maintained responsibly. A study of eighty20 showed that around 20% of South Africa’s 1.2 million young people aged 18-24 were active in credit. In addition, student debt would have increased by 16.5 billion from March 2022.
It is important to make people aware from an early age of the pitfalls of credit agreements and to make them understand the different types of debt. This will lead to better decision making in the long run.
Different types of credit or debt
There are two main debt or credit agreements – secured and unsecured. Secured debts, such as home loans and vehicle financing, require you to post an asset as collateral in case you cannot make your payments, in which case the lender may take your asset. Secured debt tends to have better terms that save you money while being responsible for the risk. Unsecured loans, such as retail accounts, personal loans, credit cards and overdraft facilities, mean less risk for the consumer because the lender is responsible, but you will be charged for this luxury.
With a Personal loanthe larger the amount lent, the longer the payment term will be, and if taken with registered creditors and lenders, interest rates for these loans are normally in the range of 3% to 30%.
Payday loans are structured over a short-term period and help you get to your next payday. The repayment terms for these depend on how long before your next payday/salary date you get the payday loan for. Although these loans can help you get out of a bind, they are expensive because the interest rates are high.
A consolidation loan refers to taking a loan amount to cover several debts. Essentially, you have a big debt, paying off smaller debts. Alexanderson says, “It’s important to do your calculations very carefully here, as these loans also come with significant initiation fees, administration fees and longer repayment terms, which could end up costing more than the debt itself.
A vehicle financing credit agreement normally has a repayment tenure of between 36 and 72 months. The longer the term, the lower the payout, but on the other hand, the longer term will equate to a higher overall amount repaid. “Auto financing also comes with the option of a lump sum payment. With this, the monthly payments are lower, but there is a large lump sum to pay at the end of the term,” adds Alexanderson.
When it comes to home loans, most require at least 10% deposit to secure the loan. It’s a good idea to opt for a fixed interest rate on a home loan, to better plan your monthly expenses and not be surprised by higher repayments when interest rates rise.
The last type of loan is a student loan, which covers higher education costs and includes your textbooks and accommodation, which ultimately adds up. Normally, you have to pay the monthly interest on the loan while you’re in school and start repaying the loan in full once you get a job.
This is a serious problem for our educated young people. Even before they start earning a salary, they have a huge debt, which prevents them from saving money successfully,” said Sébastien.
How to manage your debt
- Make sure you know what is reflected on your credit reportA credit report is a detailed and objective record of all your credit transactions which is used to determine credit score and it is virtually useless to apply for a loan if you have a credit report full of judgments and history of wrong payments.
- Make sure you know the interest rate, repayment term, and monthly payments for the new debt you’re taking out.
- Make sure you have credit life insurance in the event of death, disability and layoff.
As South Africans increasingly rely on credit to make ends meet, young people’s spending priorities must change.
“Young people need to be encouraged to live within their means and need to learn how to have a better relationship with money to be able to build a secure future for themselves and for our economy,” concluded Sébastien.