How to choose a credit product

Having a credit facility can be very useful in managing your finances – as long as you know which product best suits you, and how to manage the resulting debt.

Having a credit facility can be very useful in managing your finances – as long as you know which product best suits you, and how to manage the resulting debt.

Banks, lenders, retails, etc. provide a wide range of credit products, and the ones you choose will depend on your circumstances.

Long-term Credit

If you are building or buying a home, you will probably need a mortgage bond or home loan. This is a long-term agreement between you and the bank or another lender, where the loan plus interest is usually repaid over 20 or 30 years. You will be required to take out life insurance to the value of the bond, so that the outstanding amount will be settled if you pass away. To find out more about credit life insurance, read our 4-part series by clicking here.

The bond is legally registered over your property and if you are unable to repay the loan, the bank can repossess the property and sell it to recover costs. The interest charged on the loan can be fixed for several years or can be linked to the bank’s prime interest rates. In this case, your monthly repayments will increase if interest rates go up.

If you are buying a car, furniture or appliances and don’t have the necessary cash, the seller may be able to arrange finance for you from a bank that specialises in hire purchase (HP) agreements.

However, HP is expensive, and you usually end up paying more than double the purchase price for the item. If you cannot pay for a month or two, you run the risk of having the item repossessed. As with a mortgage loan, you are obliged to take out life insurance to get the HP loan, which is an added expense.

Some banks have special divisions that only provide loans for motor vehicles, with interest rates that are more favourable than ordinary loans. If you have an accident or your car is stolen, you would still need to repay the loan, unless you have insurance cover. If you stop repaying your loan, your car will be repossessed and sold to defray costs.

Short-term Credit

With revolving credit products, such as credit cards, a fixed amount of credit is allocated and can be used however you wish. Credit cards can be used at most stores, and you need to pay the monthly minimum amount towards your outstanding balance. There are annual card charges and optional lost card insurance charges.

With a personal loan you borrow a fixed amount from a bank or lender, and then repay that amount plus interest over a predetermined period. Personal loans may be useful when you unexpectedly need a large sum of money quickly, for instance, for unforeseen medical expenses.

A payday loan is a lump sum loan that has to be repaid in full the month after it is given – with interest.

These short-term online loans are generally for amounts up to R4 000 for first time applicants and R10 000 if you have taken out a loan before with the same credit provider. The repayment period varies but generally is less than 45 days.

Whatever credit product you choose, make sure that the institution you borrow from is a credit provider registered with the National Credit Regulator and abides by the National Credit Act.

To avoid having your credit application declined, it’s important to know where you stand with your credit accounts before you apply. Compuscan’s www.mycreditcheck.co.za offers free full credit reports, where you can find your account payment history, balance and installments.