In an ideal world you would never have to borrow money. No one enjoys being indebted to another person or company, but for the majority of people borrowing in some form is necessary so the important thing is to keep abreast of your finances and always know what you are committing yourself to when you sign on the dotted line.

Justmoney.co.za is here to help you find the best financial products for your needs, from credit cards to home loans, but before doing so you should read this guide to get an idea of how you can find the best form of borrowing to suit your needs…

Forms of borrowing

When you borrow money you make a commitment to paying it back over time. The period over which you will pay off your debt will depend on how much money you borrow and what for, and of course the agreement with your lender.

Short/mid-term borrowing — The main types of borrowing you may choose to use are short and mid-term loans such as personal loans (also known as short-term loans), credit cards, bank overdrafts, vehicle finance, store cards and in-store finance, which is sometimes referred to as hire-purchase or a credit agreement.

Long-term borrowing — There are fewer types of long-term borrowing, but they include long-term personal loans and mortgages, also known as home loans and bonds. Debt consolidation is another long-term option because this is usually a form of mortgage that is secured on a property.

Other forms of long-term borrowing in other parts of the world include second charge loans or secured loans which are, again, loans secured against a property. Also growing in popularity in South Africa are equity release mortgages, designed for older people. Visit the Justmoney.co.za equity release page for more information.

What type of borrowing is right for you?

If you only want to borrow a small amount of money for a short period of time then there is no need to get yourself a large personal loan. Conversely, if you need to borrow a large sum of money and will not be able to pay it back quickly then you should steer clear of just piling up debt on credit cards. It is important to use the right form of borrowing for your circumstances; otherwise you may find yourself in a far worse position than need be.

Overdrafts — Having an overdraft facility on your bank account is a fairly safe and practical form of day-to-day small sum borrowing. The maximum that you can borrow is negotiable with your bank, but will not exceed your monthly income so it is hard to get yourself into very serious debt trouble. The interest rate on an overdraft will be quite high, although this is negotiable with your bank, so this means that it is best to only use your overdraft if you need to and to try and pay it off quickly rather than letting the debt and interest build up.

Tip — Because it is an expensive form of borrowing you should only have an overdraft as an 'emergency' buffer for when you occasionally need more money that you have available in your bank account.

Credit Cards — A credit card provides a similar means of borrowing to an overdraft facility, but you can borrow more and at slightly better interest rates. You should consider using a credit card if you want to borrow a small to medium amount of money, no more than a few thousand Rand, and intend to pay it off quite quickly. This may be useful if there are things you need to buy and cannot afford it at the time, but know that you will have the money soon enough. For example, you may want to use a credit card to help pay for a large item such as furniture or electrical goods knowing that you will be able to pay off the credit card debt in three or four months. If you need a credit card you should aim to get one with an interest rate of around 20 percent, though some charge as high as 30 percent whilst others charge lower interest rates of 18 percent.

Tip — Check out the Justmoney.co.za credit card page comparison calculator for more information.

Store Cards — A store card is a bit like a credit card, but it is offered by a particular store or retailer and may be a useful means of borrowing if you are purchasing expensive items from a particular shop. Also, a retailer will often offer an incentive of discounts or savings on purchases to persuade you to apply for a store card. However, it will in most cases charge a higher rate than a normal credit card or even buying something on hire-purchase so you should think carefully before getting one of these cards. But remember that the interest rate will probably be the most important consideration rather than the rewards you can get from the store, and it is tempting to carry on buying, so you will be saddled with a lot of expensive debt on your store card.

Tip — Avoid store cards as you will pay a high interest rate. Either pay with cash or a debit card, or, if you must pay on credit, get a credit card with a lower interest rate.

In-store finance — Some stores offer finance agreements to help you buy furniture and other items you may want for your house. These will be mid-term credit agreements and may be a good idea if you want to enjoy the quality of life your new salary offers but do not have the capital to do so right away. If you know that you will not be able to pay off a purchase debt very quickly then it is more sensible to use an option like this to borrow rather than a credit card, but be aware that this in not just a short term commitment. You may be paying instalments for many months or even years so do not only look at the interest rate, but also the period of borrowing.

Tip — In-store finance can be confusing and some stores try and give you a micro-loan (which is usually more expensive) instead of real hire purchase. As with any purchase, it is better to save up the cash instead of getting it on credit. However, if you must use credit get a quote for a personal loan and compare the repayments with what the store is quoting to see which is cheaper.

Short-term to mid-term personal loans — If you need to borrow significant sums of money but want to pay it off in the short term then this may be a better option for you rather than amassing lots of smaller debts in different places such as overdrafts, credit cards and in-store finance. You can usually borrow up to R30 000 with an unsecured personal loan, but the interest rate can be as high as 42 percent depending on your personal circumstances and your credit history. If you have a poor credit record, with arrears in the past, you could end up paying a lot of money in interest. Unsecured borrowing means that the lender does not have the security of an asset, such as your home or your vehicle, which they could possibly repossess if you do not make your repayments.

Tip — Only get a personal loan if you know you can make the repayments. If you are looking at a personal loan because you are struggling to pay off other debts, then debt consolidation or debt management might be more suitable.

Turn to page two for ideas and advice on vehicle finance, home loans, debt consolidation, debt counselling, the National Credit Act, your credit record and debt counsellors…

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