Many South Africans are struggling to handle their finances and support their families. The cost of living has become increasingly high, interest rates are rising, bond repayments are becoming more burdensome, and salaries remain stagnant.

According to BusinessTech, many consumers rely heavily on using credit cards and loans to fill financial gaps and make it through the month. It is therefore important to distinguish between debt that benefits you and debt that is detrimental. South African credit providers try to attract new customers through strategic marketing and wide product offerings.

So, What Is Debt And How Does It Work?

Debt is a sum of money owed by one person or organisation to another. Many rely on debt to fund purchases they couldn’t otherwise afford. Borrowing money from a credit provider comes with interest and fees. It’s important to understand and distinguish between different types of debts, so that they can be utilised effectively. Using too much debt can push a consumer into a debt cycle and possibly push them into an over-indebted position.

Why Is Important To Understand The Cost Of Credit?

Before making a lending decision, the borrower needs to take all costs and risks into account. The borrower needs to take the full price, monthly repayment and duration into account. Unfortunately, those that are desperate often overlook these factors in order to get cash quickly. This can lead to financial mistakes and impact one’s monthly budget.

So, What Is Good Debt And What Is Bad Debt?

Let’s Start With The Good…

Good debt refers to borrowing money and using it for possible long-term advantages. Repayment terms should be reasonable and affordable. Good debt is used on items or investments that appreciate and bring returns that should outweigh the costs. Now, there are different forms of good debt, here are a few examples.

• Home loans – buying a home is largely considered to be an investment that yields great results in the long run. Properties can be rented out or renovated to increase market value.
• Business loans – investing in your business or taking out a loan for beneficial changes is a wise decision for your business and future if you get it right. Furthermore, not all businesses succeed so the risks will still need to be taken into account.
• Student loans – education in South Africa is not easily accessible or affordable for many, but it offers long-term advantages and beneficial investment for one’s future. A degree or diploma is an investment into future earnings and expertise.
• Vehicle loans – financing a reliable vehicle not only provides transportation but also offers an opportunity for income.

Now, Let’s Look At The Bad Debt

Bad debt doesn’t contribute to wealth generation or offer long-term value. Using debt for lifestyle or unnecessary items is costly and considered bad debt. Unsecured debt, such as personal loans, credit cards, store cards and overdrafts carry high interest rates in South Africa. Typically, the interest on these debts ranges from 15 – 60% p.a. Therefore, buying unnecessary items using this form of credit will cost you in the short and long run.

Examples of bad debts are:

Lifestyle loans – borrowing money from various providers for items that either hold little value or do not have a long-lasting impact, such as luxury vacations, gadgets, and expensive clothing. Items bought using unsecured debt will cost you much more than the item itself after the fees and interest.

Credit card debt – using your credit card excessively and not paying the full amount each month can quickly accrue interest and cost you a lot, if the balance remains negative.

How Can Consumers Avoid Bad Debt?

Make Sure To Have Emergency Savings

Insufficient savings often lead people to rely on debt to cover their expenses. This dependence can result in a cycle of debt that becomes difficult to break free from. Many South Africans don’t prioritise emergency savings due to difficult financial circumstances, leading them to rely on borrowing and becoming over-indebted.  Saving monthly can prevent costly debt during financial emergencies.

Monitor Your Budget

While debt may provide some temporary relief to consumers, it is important to control excessive spending. Overspending and accumulating too much debt might result in you becoming over-indebted. This is when your income is not sufficient to cover your living costs and debt repayments. It is difficult for consumers to get out of this position. They can easily get into an unforgiving debt cycle.

Understanding Your Credit Score And Debt

Your credit score shows lenders if you can afford new debt and if you are a low or high risk borrower. The economic situation in South Africa has made it harder for people to manage their debt and make timely payments on their cars and houses without the fear of legal consequences.

Vantage helps consumers all over South Africa with how to manage their debt. Contact us today to see how we can assist.