Good debt vs bad debt

Inflation, constant interest rate hikes and just the general difficulty of getting through the month nowadays have forced many South Africans into making debt. And while we may still have our parents’ voices drilling it into our heads that any debt is bad, this is not necessarily true. There is such a thing as ‘good’ debt, and it can actually improve your credit score, help you get better interest rates on loans and ultimately add to your life in a meaningful way.

Good debt

There are very few people who can put down cash for the big buys of life like a car or a home. Good debt is the kind of debt that increases your net worth or improves your and/or your family’s life in significant ways. It could include:

• Student loan
  Student loans can be seen as an investment in your future if the qualification is going to help you secure lucrative employment. Be careful of investing tens, or even hundreds, of thousands into a qualification that may not get you a well-paying job, because you will still have to pay the loan off.
• Mortgage loan
  Why pay off someone else’s bond when you can pay off your own? A mortgage is one of the best kinds of debt, because you are left with an asset that generally appreciates in value over time. However, it’s important to determine what level of expenditure you can afford – rather get the smaller house that you can comfortably afford than the bigger one that you can just barely make the payments for, or this ‘good’ debt can quickly dwindle over into the territory of a ‘bad’ debt.
• Borrowing to consolidate debt
  A debt consolidation loan is good debt, as it combines many of your crippling debts into one, more manageable loan and repayment plan. It may also have a lower interest rate than the individual loans. This helps you clear your name and regain your financial future.

Gray areas

Oftentimes, a loan can be considered good or bad depending on your particular circumstances. For example, a vehicle loan can be seen as good if having the vehicle allows you to get to your job and avoid costly transport fees. But splashing out on high-end vehicles that are more for show than for getting you from A to B makes a vehicle loan a bad debt – especially if you are unable to afford the monthly repayments and end up defaulting.

Credit cards can be seen as good debt if you keep their use limited only to emergencies, and make sure you always pay them in full every month. Using a credit card to purchase frivolously like expensive clothing, holidays, eating out, etc is unwise and, because of the high interest rate, puts this kind of loan firmly in the bad debt category.

Bad debt

Bad debts are those that drag you down financially, and usually have high or variable interest rates. They are used for discretionary purchases or for things that lose value. But any debt that you are unable to afford in the long run becomes a bad debt. The obvious culprits include:

• Clothing accounts
  Everyone needs clothes, but store accounts encourage unnecessary spending and often come with high interest rates. Don’t fall into the trap of spending too much on clothing you will get only temporary pleasure from, but will have to pay off long after they’ve lost their appeal.
• Luxury items on credit
  It’s nice to have nice things, no one’s denying that, but you don’t really need the brand-name coffee machine, high-end holiday or fancy car. Lending money to spend on frivolous, unnecessary items will only hurt your financial future and bring you no long-term gain.

The takeaway: Good debt grows your financial wealth and future in the long run. Bad debt degrades your financial future and is often spent on unnecessary nice-to-haves. However, any debt that you cannot afford to repay becomes bad debt.

• You must have a good credit score. The higher your score – the better.
• Your employment is a relevant factor. You need to have a regular monthly income of at least R4000.00 or more.
• You need to have a healthy annual income. The higher your income – the better your chances of getting approved. Loan providers will look at your credit report to check if you have a good repayment history. If they can see that you can make regular payments, then getting approved will be a seamless process.

Enjoy the convenience that comes with applying for a personal loan – apply today smart-loan.co.za

UNDERSTANDING CREDIT SCORE

If you’re planning on taking out a personal loan, you’ve probably heard of the term “credit score” but what does it actually mean and how are you affected? Basically, a credit score is a number that will determine the likelihood of you paying back credit. Credit providers will look at your credit history when calculating a credit score as this alerts them to the level of risk involved in lending you a loan, a credit card, etc.

What to know about credit score

The quickest way to build a credit score from scratch is to apply for a credit card, open a clothing account, phone contract, or vehicle finance. By doing so, you’re building a credit history as many credit providers will not assist you if you don’t have a credit history. It’s important to maintain a good credit history as this will count in your favor when providers need to extend credit to you.

Having a high credit score is a good thing, it simply means that you are a low-risk borrower which makes you the ideal candidate for home loans and vehicle financing. With a bad credit score, you run the risk of being declined or higher interest rates which in turn affects the amount of money you need to pay back. Your credit is calculated using the following information contained in your credit report:

• Account information
• Payment history
• Public records such as bankruptcy
• Total debt
• Number of inquiries for your credit report

Here’s what you can do to improve your credit score:

Life is unpredictable and we constantly find ourselves in emergency situations where we need to apply for a personal loan. This is a norm for a number of families where things are constantly breaking or getting lost, and children need medical attention where a piggy bank might not be a viable choice. The obvious decision becomes a loan from a credit facility and a reputable one is a must.
The next step is choosing a loan that best suits your needs. There’s quite a wide selection of loans, however, these can be divided into two categories: secured and unsecured loans. It’s vital that you know the pros and cons of each as this will help you to choose the right one. The same could be said about understanding credit score as this affects both loan applications.

Secured Loans

Secured loans are protected by an asset or some form of collateral. This has to be an item which is owned such as a car or home as this can be security that the loan will be paid back. This makes secured loans ideal as these are safer for the lender and in most cases affordable for the one borrowing. Due to the low risk, there are lower interest rates. Should the borrower fail to make the payment, the risk is that the bank can claim the asset or collateral offered as security. For some, this means possibly losing a home or car.

Advantages of secured loans

• Account information
• Payment history
• Public records such as bankruptcy
• Total debt
• Number of inquiries for your credit report

Disadvantages of secured loans

• A home or car can be lost due to payment failure
• Longer repayments periods come with higher interest charges

Unsecured Loans

FINANCIAL RISKS OF BUYING A HOUSE

Thinking of buying a house? Here’s what you should know

Besides the fact that owning a house is one of the most rewarding things you could buy, property ownership gives you a sense of security that comes from being able to call a tangible entity your own. It is important to be aware of the risks that are involved when you are interested in buying property. This is so you can plan effectively for any challenges that head your way in the process.

Avoid taking on additional debt

When buying a home many people assume that banks only monitor their credit profiles and perform updated affordability checks prior to the home loan approval process. However, this process continues for at least three months until the property registration process is over. So, if you have taken on extra debt or you have defaulted against credit providers, this can result in the bank repricing and in some extreme cases – declining the loan altogether.

Home loan repayment defaults