Need To Borrow Money?
The experience of South Africans varies greatly when it comes to credit. Regrettably statistics show that more than 9 million credit active consumers have some level of impairment in their credit records.
Christoph Nieuwoudt, CEO of FNB Consumer Segment says the common issue that sometimes leads to an undesirable credit experience is that some consumers do not understand the type of credit they require for their needs.
“What we often see is that people simply want money or access to credit, however very few take time to think or inquire about the type of credit they need. Whether it’s to top up education tuition, buy a pre-owned car to get around town or to cover emergencies when your savings aren’t enough – it’s important to pick the right credit solution,” he says.
Nieuwoudt explains the different lending solutions to help you make an informed view in your credit journey:
This is usually the starting point for most consumers and this type of credit often comes in the form of store cards. What’s important to know is that retailers don’t actually give you money, but rather provide ‘finance’ against your purchase of goods from their store. While retail credit helps to facilitate access to credit, it is not always ideal for you from a value or cost of credit perspective.
For most people, unsecured term loans would be a natural starting point in terms of access to credit from a bank. The advantage for the consumer is that there is no security or collateral required, and that it is readily available for qualifying individuals.
While term loans are relatively accessible, Nieuwoudt says you should always weigh the pros and cons when considering term loans with very long repayment terms (e.g. longer than 60 months) as the total cost of credit can become high.
“If you are taking a term loan with a long repayment period, it’s advisable to rather use it for creating longer-term value such as funding education or home-improvement and not for short-term consumption,” he says.
As a bank account holder, your next natural credit product may be an overdraft linked to your transactional account. From an FNB customer perspective, the bank is of the view that every qualifying customer should consider an overdraft for the following reasons: it is free with zero monthly fee if not used; it provides immediate access to cash for emergency; and there is no specific repayment, but rather the customer’s salary naturally ‘settles’ the balance every month.
The purpose of a credit card is to facilitate and responsibly fund your spend, including providing protection from fraud and/or non-delivery of services or goods, insurance on travel and access to even richer reward benefits.
“An ideal credit card facility should allow at least the 55 maximum days of interest free operation as this is not too onerous for the customer. This is the value we offer our customers to limit the interest burden,” adds Nieuwoudt.
Buying that first car is an experience most consumers cherish for the rest of their lives. Building up a reputable credit record through responsible repayment of unsecured credit is a major advantage when applying for vehicle finance as it demonstrates your credit management discipline.
“In the case of FNB customers, finance provided by our sister company WesBank (and its partners) naturally takes the FNB relationship into consideration to facilitate finance availability and pricing,” he says.
Home Loans or mortgage
The ‘ultimate’ credit product which is best associated with long-term value creation is the home loan. For a first or smaller house, typically a deposit is not required, but customers still need to consider the total costs associated with buying a house.
Some may look at the total amount of interest payable over a typical 20 year period and conclude that mortgage finance is expensive. However, this should be offset against the cost of renting as well as the appreciating value of the property. Consumers can also reduce the interest payable if they make payments in excess of the minimum amount.
Nieuwoudt says overall, the key to getting maximum value from credit products is to appreciate the purpose, benefits and cost of each, as well as how you use but not abuse credit. He says following this simple thought process could earn you significant ongoing value from even simple products like the overdraft, credit cards and occasionally term loans, while being able to finance the purchase of key assets like vehicles and homes.