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Tuesday, 22 January 2013

Tips for borrowing wisely to avoid financial hardship

As the New Year kicks off and economic conditions remain as tough as ever, borrow and manage your debt wisely to avoid becoming over-indebted.

It is tempting to purchase things you might not otherwise be able to afford on credit, but debt can be a major drain on your finances and dent your long term financial goals.
Just because lenders may be willing to give you a loan, doesn’t mean you should take up the loan or the full amount offered. 
Before taking on credit make sure that you have enough money to cover your regular expenses, emergencies and future price increases. Taking all these factors into consideration can you afford the repayments on the money you borrow over the term of the loan in addition to what you already owe?
Important expenses to consider include household and car maintenance, school fees, transport, food and municipality bills. It is also important to set money aside or have insurance to cover emergencies like illness, death and retrenchment.  Draw up a budget to determine your regular expenses and income.  Under the National Credit Act (NCA), lenders are also required to do a thorough affordability assessment to ensure that you can afford to repay the debt. Make sure you honestly disclose all your expenses and are upfront about how much other debt you already have. You don’t want to get into a situation where your loan is possibly reckless and you lose your rights to claim reckless lending.
Be wary against borrowing money from some informal lenders that may not comply with the law, especially with regards to the interest they charge and their collection methods.  All lenders, whether registered or not are required to comply with the NCA and it is important for consumers to understand their rights and obligations. The retention of ID books, bank cards and pin numbers is outlawed and should be reported to the National Credit Regulator (NCR).
Consumers should also be aware of garnishee orders.  These allow the lender to deduct repayments directly from your salary after the obtaining of a court order by the credit provider.  In particular be aware of signing blank consent forms or any other document you do not understand.  Consumers can approach the NDMA for advice if they are not sure of what their rights or options are. 
It is also important to be proactive in handling any repayment problems.  Contact your lender or the NDMA (National Debt Mediation Association) as soon as you think you may not be able to make a payment, as you may be able to work out a solution.  If you fall behind on payments and you do not act early, you may also face late payment charges as well as collection and legal fees, which can add up to many times the amount you initially borrowed.
Tips for borrowing wisely:
Understand your rights and obligations: Know your rights and obligations as this will ensure that you make the right decisions. More importantly know your options and where to go in case problems arise.
Borrow within your means: Only borrow what you can afford and try as much as possible to borrow for essential things like a house, a car, small business, education etc.
Make your payments on time and in full: You may think missing a payment is not a big deal, but doing so without the lender’s permission will negatively impact your credit rating and you could pay more interest in the long run.
Understand how much interest you will pay: The amount of the loan and the time you take to repay the loan will have a big impact on how much you’ll spend over the life of the loan.  Make sure you understand how interest is calculated and what the loan will cost you after all other fees and charges are included. .
Be aware of all the fees:  Lenders can charge you a range of fees including up-front initiation, and monthly service fees.  Credit cards may charge annual fees and additional fees for certain transactions, so find out what costs you will be paying and factor this into your budget. If credit life insurance is included ensure that it is reasonable, that you have the policy document and you inderstand the claims conditions and procedure.
Shop around:  Credit costs money, so compare different interest rates from different lenders.  In addition to ensuring that the interest rate you are charged is legal; also check the terms of the loan and the period over which you will pay it back.
Read the small print: Don’t feel pressurised into signing a loan agreement without taking the time to understand the conditions.  It’s also your right to ask an independent person to explain the terms to you in the contract before you sign

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