Manie van Schalkwyk
BEFORE taking on debt, consumers need to make sure they understand the true costs of borrowing and payment conditions.
You can end up paying many more times what you borrowed in interest alone.
Interest rates differ for long- term debt, such as home loans and short-term debt, such as credit and store cards.
While your home loan may cost between 8-12% in interest on outstanding amounts, credit cards will cost you up to 22% interest every month. When it comes to taking short-term loans, credit providers can charge up to 60% interest.
The best advice is to borrow as little as possible. Borrowing to fund your children's education or a home loan can be a good thing, but taking on debt to pay off other debt or fund luxuries can condemn you to a lifetime of being in the red.
Consumers should investigate debt consolidation offers from banks thoroughly. A consolidation loan offers to combine all your debt into one loan agreement. It may be easier to manage your repayments, but make sure you are not paying a very high interest rate on both your long-term and short- term debt.
You should also be aware of garnishee orders, which allow credit providers to deduct repayments from your salary, after you have defaulted on the original debt repayment arrangement.
Make sure you understand exactly what you are signing, what costs are involved and how much will be deducted from your salary each month.
In some cases, we find employees taking home next to nothing after deductions of garnishee orders.
It can be a lengthy and costly legal battle to change garnishee orders, so don't be afraid to ask all the questions up front and at the time of signing a consent to judgment document.
Under the National Credit Act (NCA), it is your right to be given a pre-agreement statement and quotation when seeking credit.
These will outline the terms and conditions of the proposed agreement and all costs, involved, such as cost of credit, interest, service fees, initiation fees, credit insurance, deposit required, number of instalments, date of first instalment and last instalment.
Consumers should never sign a blank credit agreement as you will not have control over information added after you sign.
The loan agreement should also contain all other charges that will be added. Only borrow from a reputable credit provider, otherwise you will have no recourse if things go wrong later.
If you do run behind on repayments, contact your credit provider as soon as possible and before the account is handed over for collection and legal action. They may be willing to negotiate a payment holiday or reduce your instalments.
The quicker you seek help, the quicker you will be able to get out of debt.
Tips for borrowing wisely:
1. Budget. What is the difference between how much income your family earns and what your total expenses are each month? Will you be able to pay for your debt once you've covered all your expenses? What if interest rates go up, how much more will you be paying? You should also plan for unexpected costs, such as if you are in an accident or one of your family members is retrenched.
2. Borrow as little as possible. As a rule of thumb, you should not borrow more than 35% of your income or you could run into trouble on your repayments. Put aside at least 15% of your income every month in a safe investment for your retirement.
3. Honesty is the best policy. Disclose all the information required to your credit provider, particularly for the affordability assessment. If you're dishonest, you could lose the protection offered by the NCA against reckless lending.
4. Pay on time, every time. Paying late will adversely affect your credit rating and possibly your ability to take out credit in the future.
5. Check your credit report regularly. This way, you'll be able to identify any errors and correct them.
Manie van Schalkwyk is the Credit Ombudsman.
