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Consumer Affairs
Monday, October 27, 2014 - 16:12
Getting it right

Credit plays a vital role in growing the economy of South Africa. Without it many people would not be able to buy a house, a car or pay for other lifestyle related expenses. However, it is important that consumers considering credit are fully aware of how it works and are confident they will be able to pay it back in order to prevent the debt becoming a future financial burden.

This is according to Debbie Sharwood, Head of Communications of Wonga.com South Africa, who says that consumers take out loans for different purposes, but often do so without understanding or considering the type of loan being offered. “Before consumers choose to take out a loan, it is incredibly important that they do proper research on the type of loan being offered, as well as the company offering it.
“If a loan is taken out when it isn’t needed, or is not the right type of loan, consumers could end up paying higher interest rates than are necessary, creating unnecessary debt and can even place their assets in danger in the event that they default on the loan,” she adds.
Sharwood provides the following easy-to-digest breakdown of the various types of loans available.

1] Secured loans

When it comes time to purchasing a home, or an item of a great value, a suitable loan to consider is a secured loan. A ‘secured` loan means that the amount being lent to the borrower is secured against an asset that they own. In many cases, larger secured loans are also often linked to the prime interest rate.
Sharwood says that the asset becomes the collateral in the loan and because there is an asset attached to the loans, lenders consider this type of loan to be low-risk. “This often lowers the interest rates charged while the amount that can be borrowed is often higher. Repayments for a secured loan can also be spread over a longer term. However, if you fail to keep up on payments, you stand to lose the collateral secured against the loan, as your creditors can sell it off and reclaim their money.”

2] Unsecured / Personal loans

Unsecured loans, which are also known as personal loans, do not have any collateral placed against them and therefore are widely considered a higher risk to the lender or credit provider, as the borrower generally stands to lose less if they run into trouble with payments. Unsecured loans are available in smaller amounts over a shorter period compared with secured loans.
That said, borrowers who fall behind on payments will still face consequences - in a worst case scenario, borrowers can receive court judgments, which force them to repay the amount, such as a garnishee order. In some cases the courts can even have the terms of the loan changed to become a secured loan, meaning it is still possible for borrowers to lose their homes or other assets should they default on the loan repayments.

3] Home / Mortgage loan

Many consumers interested in purchasing a home struggle because of the challenge of raising the finances. Home loans (or mortgages), a type of a secured loan, are specifically aimed at funding the purchase of a home.
Sharwood says that home loans work slightly differently to personal loans, in that they normally require a deposit (usually at least 5%-10%, although currently lenders tend to prefer closer to 20%) and usually last longer than other loans. “By default, home loans are secured against your home, meaning your home may be repossessed if you fail to keep up on payments.”

4] Credit card

When taking out a credit card consumers are usually given a set amount on it that they are able to spend. A credit card is considered a loan because the consumer is offered money to spend that they will have to pay back with interest.
Credit cards can be used for online shopping, booking tickets or for slightly bigger purchases without having to take out a personal loan. In addition, credit cards can help to improve a credit score for those who are considering in purchasing a home or new car – provided the credit card owner keeps up a good credit record by paying their instalments on time.
“The unfortunate thing about credit cards, is that the banks that offer them make money by the consumer not paying on time,” points out Sharwood. “They are happy to see a credit card bill go unpaid for several months, as it means they will make more money in interest and charges.”

5] Student loan

In an ever-increasing and competitive workplace, having a tertiary qualification can help to provide an additional advantage in a job interview. As university degrees can be quite expensive, many turn to taking out a student loan.
Most student loans can be used to either cover just the university fees, or could include any related expenses such as textbooks and student accommodation while studying. A student loan is only paid back after the individual has completed their education. The interest rates differ depending on how much the loan was and in what period of time the student is able to pay it back.
“At the end of the day, when taking out any form of credit or loan, it is important that consumers do a background check and ask about the details of the specific loan they want to take out. When in doubt, rather speak to an expert who can provide you with advice on the most suitable for your needs,” concludes Sharwood.

Copyright © Insurance Times and Investments® Vol:27.10 1st October, 2014
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