The (real) cost of credit

You’re cruising around the mall and you see an expensive item that you really want to buy. You can’t afford it in cash, but hang on, the store has a credit option to pay it off. ‘What a great idea,’ you think to yourself. ‘If I buy this item on credit, it’s just the total amount divided over a few months, right?’

Wrong!

There’s a reason why so many South Africans are struggling with debt: getting into debt is so much easier than getting out of it, mostly because people don’t understand the real cost of credit.

Read this before you take out a loan, or if you use your credit card or a store card for a big purchase.

Interest

Interest is the price you pay for borrowing money. It’s usually calculated on your outstanding balance and payable monthly. So, the longer you take to pay off the loan, the more interest you’ll pay in total. (The inverse is true if you pay off the loan faster.)

Interest charged can be as high as 30%+ per year, depending on your credit score, affordability and the type of loan you’re taking out. The National Credit Regulator (NCR) regulates the maximum interest that can be charged — read more here.

Initiation and monthly services fees

You’ll be charged a once-off initiation fee when you enter into a credit agreement with a lender. Thereafter, you’ll be required to pay a monthly admin fee of up to R69. On top of this, some lenders also exact a monthly credit facility fee — and a card fee! These fees should all be stipulated in the credit agreement. Read it before you sign it! You have a right not to proceed with the loan if you’re not happy with the conditions.

Insurance

Here’s another cost… Credit life insurance provides cover for your loan repayments if you’re unable to pay due to loss of income, retrenchment, disability or death. You don’t have to take out credit life insurance with the creditor offering the loan as long as you can prove that you already have the necessary insurance.

Loan term

With most credit or loan agreements, you can select the term of the repayments. With a longer repayment term, you’ll pay less each month but you’ll end up paying a lot more in interest in the long run.

Enough theory, give me an example…

Say you borrow R10,000 at an interest rate of 22%. If the initiation fee is R1,207.50, the monthly admin fee is R69 and the credit life insurance fee is R39.23, the table below shows what you’ll end up paying over three different loan terms.

Note how if you select a 36-month term, you’ll pay less per month but you’ll end up paying back nearly double the amount you borrowed. That smartwatch isn’t looking so appealing anymore, is it?

* Includes total monthly fees, interest and insurance

Final word

Always think twice before you buy something on credit or take out a loan. If you absolutely have to, shop around at a few lenders and do your research on the various fees and interest rates you’ll be charged. Adjust your budget to include your repayments and try to pay more each month so that you pay off the loan as quickly as possible.

Or, better yet, avoiding getting into debt altogether!

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Thoughts, observations and insights. About money, life and 22seven. Visit 22seven.com