Taking loans for the right reasons

Tough times, cash crunch and more month than money. While these terms are often bandied about regularly, millions of consumers are faced with the reality of struggling to make ends meet. Taking out a loan or other forms of credit may solve a money predicament, but it is important to do so responsibly. This is the message from Bayport South Africa, which encourages consumers to stay on the good side of credit. Tessa Verwoerdt, HOD: Money Solutions at Bayport says anyone considering a loan should ask themselves some primary questions before borrowing:

• Why am I borrowing money?
• Is a loan really the best way to pay for it?
• Can I afford the monthly repayments?
• Is now the right time to borrow?
• How stable is my job?

Verwoerdt offers advice on responsible borrowing. First and foremost, borrow only as much as you need and whenever you have some extra cash, put it towards paying off your debts. Why? If you repay the loan quicker, it will cost you less because of the interest you save. What’s more, it can positively impact your credit score. Other noteworthy points are:

1. Consider debt consolidation: Debt consolidation means that you combine all your debts, such as car loans, credit cards and payday loans, into a single loan with a fixed rate, fixed monthly payment and fixed term. Consolidation is not only necessary when consumers are financially distressed. Any disposable income can go into savings or towards paying more into your debt to reduce the term and reduce the amount of interest paid.
2. Expect the unexpected: Unplanned emergencies happen and there should be contingencies in place for unexpected expenses like funerals or medical costs. Most people can’t easily include these expenses in a regular monthly budget, and often, the costs are unknown. Taking a personal loan for an unforeseen cost can help you to deal with these unforeseen emergency expenses.
3. To create a credit history: If you are a new small business owner with no credit history, you can secure a loan to add value to your business. Just like personal credit scores, the greater the number of creditors which report a good payment history, the better the business credit score will be.
4. Invest in your business: A loan may allow you to grow your business. You can secure a loan to add value to your business by purchasing equipment that will increase productivity levels.
5. Home improvements: Whether you want to renovate, improve or extend your house, a personal loan is a great option if you don’t have funds available on your home loan.
6. Education: With the rising cost of education, paying for study fees can be expensive. Borrowing money for education is considered “good debt” as investing in education can pay off throughout your life by increasing your lifetime earning potential.  Alternatively, a good education is a solid foundation for your children’s future.

Verwoerdt concludes that some reasons are better than others when it comes to borrowing. “The bottom line is that you should never borrow money when it is not necessary and when you cannot afford it. If you want something rather than need it, the reason is probably not good enough.”

Go back