‘Beware funky financing’, Imara warns savers

‘Funky financing’ – the opaque financial packages that triggered a global crisis – are just as dangerous today, only this time around South African families rather than international banks could be at risk.

The alert comes from Imara Asset Management, South Africa, a company that specialises in easy-to-implement financial advice for a growing client-base.

‘Funky finance’ typically involves a financial instrument that looks attractive, but is more complex than it appears and is poorly understood by the buyer. It might be a derivative traded globally, but could equally be a credit or asset-based finance package designed to enable the purchase of a big-ticket item like a car.

The advice from Imara Asset Management comes as retail sector sales strengthen and analysts track early signs that consumer appetite for credit is reviving.

Credit appetite can sometimes be whetted by ‘creative’ financial structuring on the funky financing model, notes MD Lara Warburton.

“South Africa’s household-debt-to-income ratio still hovers around 80%,” she points out. “This means many families can’t afford to pay cash and need credit to buy expensive items.

“Financial structures can sweeten the deal by keeping monthly payments affordable. But things can go sour when the transaction’s full implications become apparent or the full term of the contract puts a dent in future plans.

“Consumers are not just buying a big-ticket item; they are buying a financial product as well. They test drive the car, but rarely ‘test drive’ the funky finance package.”

Lara Warburton has five tips for consumers:

1. Don’t focus solely on the ‘affordable’ monthly payment
2. Establish the basic cost of the purchase item
3. Establish the full cost when all credit charges and fees are layered on top and compare total and basic costs
4. Be clear about the term – how many months and years will you be paying?
5. Check your credit cost liability; e.g. if you pay off a car in three years not five, do you still have to pay the credit costs of years four and five?

“The global credit crunch was a wake-up call for business and families,” says Warburton. “Since then, many families have performed wonders by paying down debt.

“It would be a pity if funky financing at consumer level undid the good work. Credit may sometimes work in your favour. But make sure you understand the debt you take on. If you don’t understand it, how do you manage the risks?

“International banks learned that lesson. Consumers should too.”