EVERYONE knows that life happens and it usually catches us when we are not ready.
Sometimes it’s an accident or your spouse losing their job.
Piet van der Walt, head of Sanlam Personal Loans, said the role that well managed credit plays in building wealth is seen in the recent National Credit Regulator Annual Report which showed that while there are 23,27 million credit-active Mzansi people, what is worrying is that over 10 million of those have impaired records.
Van der Walt said people should consider why they need a loan before taking one.
Using credit sensibly
“While we don’t recommend getting into debt if you can help it, finding yourself needing cash when something bad happens – such as an accident or unplanned medical expenses – can be managed by a loan. It could be a real lifesaver in a crisis,” he said.
Needs vs wants
Van der Walt said a personal loan from a responsible lender and guided by a professional financial adviser can be a helpful financial management tool. “It should never be used for bad debt – such as going on an overseas holiday or for a daughter’s wedding. You should preferably only take out a personal loan to meet financial ‘needs’, not ‘wants’.
“Another use for a personal loan is debt consolidation. You take out a loan with lower interest rates and use that to pay off all your outstanding high-interest loans so you have one simple monthly payment at a fixed but lower rate and term,” he said.
Credit card vs personal loan
A personal loan is also often preferable to relying on the credit card in your wallet to get you out of a financial fix.
The total costs associated with using a credit card, such as annual costs, interest and transactional fees, are sometimes much higher than those you get when you take out a personal loan.
A credit card can be used indefinitely, so unless you are highly disciplined financially, you won’t necessarily be reducing your debt levels.
Van der Walt warned against taking out a personal loan from unscrupulous loan sharks or micro-lenders: they will offer you money quickly but they tend to also demand incredibly high interest rates even over the short term.
