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.
South African rivate 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 |