Before borrowing money, one should consider affordability and timing. If you can comfortably afford to make the minimum repayments due on the loan being considered, both now and in the event of an interest rate increase, then you are in a position to take out credit.

Private banker and professional speaker Samke Ngwenya says you should consider the criteria that banks use when assessing a credit application, a framework commonly referred to as the Five Cs of credit.

  • Capacity – Does the individual have the capacity to take out and service additional credit?
  • Collateral – Is this loan secured or unsecured?
  • Capital – Is the consumer putting forward some of their own money towards this transaction?
  • Conditions – What are the personal and economic conditions?
  • Character – What is the consumer’s repayment profile?

Ngwenya adds that credit should never be used to maintain your lifestyle. “If you are taking out credit for disposables or luxuries then you shouldn’t be borrowing money.”

What are your credit options?

Unsecured debt

Ngwenya says the advantage of unsecured credit such as personal loans, overdrafts and credit cards is that they are quickly accessible. However, they do come at higher interest rates, meaning they’re relatively more expensive forms of credit.

“As a matter of principle, unsecured or consumption loans worsen a consumer’s financial health as they have higher monthly repayments, are more risky as there is no collateral or capital, and are highly sensitive to changing conditions such as the loss of income or interest rate hikes.

Secured loans and home loans

This line of credit takes longer to access, but comes with lower interest rates. Secured loans or asset finance loans are less risky as there is security, they have relatively better interest rates, and are considered “good debt” as they are used to grow the individual’s asset base.

Loan type Interest rate Repayment term Access
Payday loan Very High < 30 days < 3 days
Overdraft High Revolving < 1 week
Credit Card High Revolving 1-2 weeks
Personal loan High Up to 5 years < 1 week
Employer Medium Varies Varies
Secured loan Medium Up to 5 years < 1 month
Home loan Low/Medium Up to 30 years +/- 3 months

How to repay your debt

Minimise the repayment period

You can minimise the repayment period on your borrowings by increasing the monthly installments in order to settle the loan sooner as this reduces the total interest repayable. Remember that interest is levied on the balance owing at the end of each day and added to the debt at the end of each month.

Avoid accessing capital repaid

Dipping back into the funds that have been repaid increases the risk of falling into a debt trap as debt is never fully repaid and closed off. A high level of debt also reduces your credit score meaning future credit will be approved at relatively higher interest rates.

Redirect payments towards savings

Once your debt has been repaid, put the same installment towards savings. Your lifestyle will already be adjusted down to cater for these payments so there is no need to change it once you have paid off your debt.