Sebastien Alexanderson, Founder and Debt Counsellor at National Debt Advisors (NDA)
It’s no secret that South Africans don’t have a great track record when it comes to debt. Retail bank FNB recently revealed that credit-active middle-income consumers spend, on average, 30% of their income on unsecured credit and 35% on secured credit. To create a future debt-savvy generation, it is therefore critical that youth are educated as early on as possible around the long-term dangers of bad behavior regarding debt.
Unfortunately, debt amongst our youth is already on a steady incline. Receiving credit from credit providers is a fairly easy task, and often leads to excess debt if not maintained responsibly. A study by Eighty20 showed that approximately 20% of the 1.2 million South African youth between the ages of 18-24 were credit-active. Additionally, student debt has reportedly risen to 16.5 billion as of March 2022.
‘It’s important to educate people from a very young age about the pitfalls of credit agreements and for them to understand the different types of debt. This will lead to better decision making in the long run,” says Sebastien Alexanderson, Founder and Debt Counsellor at National Debt Advisors (NDA).
Different types of credit or debt
There are two major debt or credit agreements - secured and unsecured. Secured debt, such as home loans and vehicle financing, involves you having to put down an asset as collateral in case you can't make your payments, in which case the lender may take your asset. Secured debt tends to have better terms that allow you to save money while being responsible for the risks. Unsecured loans, such as retail accounts, personal loans, credit cards and overdraft facilities, mean less risk for the consumer as the lender is liable, but you will be charged for this luxury.
With a personal loan, the larger the amount loaned, the longer the payment term will be, and if taken with registered creditors and money lenders, the interest rates for such loans are normally in the region of 3% to 30%.
Payday loans are structured over a short-term period and assist you with getting to your next payday. The repayment terms on these depend on how long before your next wage/salary date you get the payday loan. While these loans can help you out of a bind, they are expensive as interest rates are high.
A consolidation loan refers to taking one loan amount to cover multiple debts. Essentially, you have one big debt, paying off smaller debts. Alexanderson says, “it’s important to do your calculations very carefully here, as these loans also come with large initiation fees, admin fees, and longer repayment terms, which might end up costing more than the debt itself”.
A vehicle finance credit agreement normally has a repayment term of between 36 and 72 months. The longer the term, the lower the installment, but on the flipside of that is that the longer term will amount to a higher overall amount paid back. “Vehicle finance also comes with the option of a balloon payment. With this, the monthly installments are less, but there is a hefty lump sum to be paid at the end of the term”, adds Alexanderson.
When it comes to home loans, most require at least 10% deposit to secure the loan. It’s a good idea to opt for a fixed interest rate on a home loan, so that you can better plan your monthly expenses and not be surprised by higher repayments when interest rates rise.
The final type of loan is a student loan, which covers tertiary education costs, and includes your textbooks and accommodation which all adds up in the end. Normally you must pay back the monthly interest on the loan while you are studying and start paying back the loan in its entirety once you get a job. “This is a serious issue for our educated youth. Before they even start earning a salary, they owe a huge amount of debt, and this makes it impossible for them to save money successfully,” says Alexanderson.
How to manage your debt
• Make sure that you know what is reflected on your credit report, a credit record is detailed, objective account of all your credit transactions that is used to determine the credit score and There is practically no use in applying for a loan if you have a credit report filled with judgments and bad payment history.
• Make sure that you know the interest rate, the repayment term, and monthly installments of the new debt you are signing up for.
• Make sure that you have credit life insurance in the case of death, disability, and retrenchment.
“As South Africans become increasingly reliant on credit to make ends meet, the spending priorities amongst the youth need to change.
“Young people should be encouraged to live within their means and need to be taught how to have better relationships with money to be able to build a secure future for themselves, and for our economy,’’ Alexanderson concludes.
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