As consumers start to run out of money, the use of credit becomes a real temptation. Banks and credit providers constantly market loans on TV, radio and online, in addition to the direct SMS’s and emails sent through to potential clients. Once a certain tipping point is reached, these offers start becoming more and more attractive, if not a necessity.
Loan and credit card applications, as a result, have increased over the past year, which are used as a lifeline for many South Africans.
There Has Been A Large Increase In Consumers Applying For Loans
Over the past year, credit applications have increased by almost 20%. These are findings from the latest Consumer Credit Market Report (CCMR) released by the Natonal Credit Regulator. Over 11 million credit applications were received in the 2nd quarter, with only 50% being approved.
The Biggest Concern Is The Type Of Credit In Demand
The largest increase has been observed in the short-term, unsecured credit and credit facility applications. These types of credit carry large interest rates and fees and are easy to access. This type of debt is often used to make up the shortfall in consumers’ budgets.
At Vantage Debt Management, we always warn consumers who are actively using short-term credit to fund their lifestyle. Using too many short-term loans or maxing out credit facilities can result in over-indebtedness. Being over-indebted is a difficult thing to recover from. Consumers in this position become heavily reliant on credit and get stuck in a vicious monthly debt cycle.
Granted Unsecured Loans Have Grown By 30% Year-On-Year
All of the unsecured credit categories saw a sizeable year-on-year jump. With over half of credit-active consumers being in arrears, this statistic is of great concern. These types of debts are often the first for which repayments are missed. Missed payments result in extra fees and may result in legal action down the line.
Unsecured credit is used for many different things. Consumers that use unsecured debt for basic living expenses may be living beyond their means or not budgeting properly.
Over the course of the year, secured credit (mostly home loans and vehicle financing) also rose, but by less than the unsecured credit categories.
Here’s What You Should Assess Before Taking A Loan Or Using More Credit
Before diving into a loan application or taking up the latest store card or credit card offer, consider following these steps.
- Draw up a full monthly budget to assess affordability
- Make sure that your basic living expenses are covered
- Draw a free credit report to have a look at your debts
- Work out the minimum you need to spend in order to survive (rent, water, debts, electricity, food, clothing)
- If you have some money leftover each month, try and save for the item(s) you want or need
- If you can easily afford the loan repayments, consider the cost of the debt first and weigh it up with how long it would take you to save up
It is difficult to consider all of these things, however, in the long-run it may save you money and make sure you’re not over-extending yourself. If you are not sure how to go about your next financial decision, speak to a debt counsellor regarding your budget and current debts.