Tips for borrowing funds
Before taking on debt, the Credit Ombud, Manie van Schalkwyk urges consumers 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,” says Van Schalkwyk. “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 are allowed to charge you up to 60% interest!
“Borrow as little as possible,” advises Van Schalkwyk. “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 such as designer clothing can condemn you to a lifetime of always being in the red.”
Van Schalkwyk also warns that 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 and short term debt.”
He adds that consumers 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” says Van Schalkwyk. “In some cases we find employees taking home next to nothing after deductions of garnishee orders.”
He warns that 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’s your right as a consumer 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.
“You must know what is expected of you prior to signing the credit agreement,” explains Van Schalkwyk. “Be aware of exactly how much it will cost you and for how long. If you don’t understand something, take your time and ask for assistance.” It is also a good idea to take the agreement away and read it at home, or even to compare it to another offer from a different credit provider.
He says consumers should never sign a blank credit agreement as you won’t have control over other 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 on.”
Another key factor in the borrowing process is ensuring that the credit provider has all the necessary information for the affordability assessment. These are undertaken to ensure that you do not borrow more than you can afford and become over-indebted.
“If you become over-indebted and cannot repay your debt, credit providers can attach your assets, such as your home or car, or deduct the money directly from your salary” says Van Schalkwyk. “Not only could you end up in lengthy and expensive court battles, it may even affect your job prospects, so it’s better not to borrow recklessly in the first place.”
He explains that if you do find yourself running behind on your 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 out help, the quicker you will be able to get out of debt,” says Van Schalkwyk. If you find yourself in this situation talk to a professional Debt Counsellor quickly.
Tips for borrowing wisely:
Budget. What’s 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.
Borrow as little as possible. As a rule of thumb you shouldn’t 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.
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.
Pay on time, every time. Paying late will adversely affect your credit rating and possibly your ability to take out credit in the future. If you think you cannot meet your monthly instalments, call your credit provider immediately and try to re-arrange payments. Do not wait until you skip payments.
Home loan comes first. Pay your home loan first .
Check your credit report regularly. This way you’ll be able to identify any errors and correct them. Under the NCA a credit bureau must provide you with one free copy of your credit report each year from each of the eleven registered bureaus. Additional copies cost between R20 and R30 excluding VAT.