PERSONAL LOANS: GOOD OR BAD DEBT?

Wednesday, May 17, 2017

Many South Africans may be anticipating the long-term implications of the country’s sovereign credit rating downgrade to BB+ (junk status) by ratings agencies, Standard & Poor and Fitch, in April 2017. The biggest impact this is likely to have on the consumer is that interest rates will continue to increase, meaning increased repayments on debt1.

“This is a time where consumers need to consider tightening their financial belts by ensuring that they are not entering into any unnecessary debt commitments,” says Derek Wilson, head of online insurance and financial services comparison website, Hippo.co.za, “Some debts such as home loans or student loans are often necessary, but for others, one should consider saving up rather than creating more debt”.

Hippo.co.za found these tips on good debt and bad debt and how to save more instead of owing more:

  • Good debt refers to any financial commitment that will leave you better off in the long run. Examples of good debt are home loans, student loans, and Vehicle Finance for a car that you can afford. For these types of loans, consider realistic payback terms and try to negotiate for the lowest possible interest rate.
  • Bad debt refers to financial commitments that are not affordable, drain your wealth, and are often made for impulsive purchases or to pay off existing debt. An example of bad debt is making a loan to go on holiday where you have not budgeted for it and cannot afford it. Adopt an attitude of saving up for holidays instead.
  • Creating new debt in order to pay off old debt, such as taking out a new loan to pay off an existing loan, is hardly a good idea. Look at cutting back in certain areas and saving on costs in order to pay off debts. This could take time and discipline but once you are back on track, you would be into the habit of saving rather than creating bad debt.
  • Regardless of what your monthly expenses are, it is always a good idea to shop around to see whether you could be paying less for anything from groceries to clothing and financial commitments such as insurance and Medical Aid. Try to get at least three quotes from different providers before you make a decision.

Hippo.co.za have been assisting consumers since 2007 in getting better deals on Car, Home, Life and Business Insurance and you are even able to compare Medical Aid, Funeral Cover and Personal Loans (for your good debts of course),” says Wilson, “We continuously look at ways of helping consumers when it comes to personal finance and have recently launched our new Debt Counselling service where clients are referred to an approved Debt Counsellor through our online platform. This is to assist over-indebted consumers with repaying their debt through an affordable repayment plan”.



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