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Have you ever wondered how much your debt is actually costing you? By the time you have included all the interest and fees payable, it is probably a lot more than you realise.
You will find that, in most cases, you can easily save for those money moments by simply not paying all those hefty interest payments and fees.
Most short-term debt is simply a lack of planning. So, next year, instead of taking on more credit, plan for those money moments by starting a contingency fund in a high-interest savings account.
THE PAYDAY/EMERGENCY LOAN
If you borrow for less than six months, the micro-lender can charge up to 5% interest a month, which works out at an annual rate of 60%.
They can then include an initiation fee, monthly service fee and credit insurance.
So, if you borrowed R10 000 for four months, you would pay back:
. R1 430 in interest;
. R1 150 initiation fee;
. R276 in monthly service fees (R69 a month); and
. R180 in credit life premiums (R45 a month).
Your monthly instalments including all fees would be R3 258, leading to a total of R13 032 over four months. That R10 000 loan will have cost you more than 30% of the amount you borrowed!
Action
If you support extended family, rather than being an ATM, discuss what expenses they will be incurring over the year and how much you are prepared to commit towards those expenses, then save for these in your contingency fund.
How to save
If you had rather saved the instalment of R3 258 each month, you would have R10 000 saved within three months. So, just by planning ahead for your needs and saving instead of borrowing, you would save yourself more than R3 000.
THE HOLIDAY/LIFESTYLE LOAN
If you took out a one-year loan, your interest rate would be lower as longer-term unsecured loans are capped at 27.75% a year. But even if you qualified for a 16% rate, the effect of the fees will still result in a significant cost.
If you borrowed R10 000 over 12 months, you would pay R1 190 a month, paying back a total of R14 280, or 42% of what you borrowed. The longer you borrow for, the more it costs. On a two-year loan, that R10 000 – even at 16% a year – will cost you a total of R16 176, or 61% more than you borrowed. That is more than R6 000 spent on interest and fees.
One-year loan
Interest rate of 16%, R1 150 initiation fee, R828 service fees, R540 in credit life premiums.
Two-year loan
Interest rate of 16%, R1 150 initiation fee, R1 656 service fees, R1 080 in credit life premiums.
Action
If you are planning a holiday this year, or have another planned expense, create a proper budget to work out how much it will cost you. Then calculate how much you need to be putting away into your contingency fund each month to reach that goal.
How to save
If you saved R1 190 a month in a money market account earning 5%, you would have R10 000 in just over eight months, saving you R4 280 in unnecessary fees.
THE CAR LOAN
The longer you finance your car for, the more you will pay. For example, if you purchased a car for R200 000 and financed it over 48 months, your repayment would be about R5 270 a month. By the end of the period, you would have paid R253 000.
If you financed it over 54 months, your monthly repayment would be lower at R4 450 a month, but your total repayment would actually increase to R266 935 as you are paying interest for longer.
If you financed the car over 72 months, your repayment is only R3 910 a month, but your total repayment is R281 525. It is worth keeping in mind that, by the time you have finished repaying your car, it would only be worth about R75 000 due to depreciation – so the real cost has been your total repayment less the current value, or R206 525.
Action
If you want to buy a car, calculate how much you will be spending on repayments, petrol, insurance and maintenance, and make sure you can afford it.
Remember, the type and value of the car you buy will affect all of these costs.
How to save
Never use short-term microloans to pay the deposit for a car – you can save that amount in just a few months.
For example, if you save the value of your future monthly car repayments, you should have a 20% deposit saved in four months. Try not to finance the car for more than 48 months.
THE HOME LOAN
Although home loans have a lower interest rate than other types of loans due to the length of the loan, you end up paying the same amount of interest to the bank as you spent buying the property.
Action
Apart from a 10% deposit, you will need to cover other costs related to buying a home, including municipal deposits, legal fees and moving costs.
It’s important to do your research, and budget and plan properly so you don’t start home-ownership with short-term loans.
How to save
The best way to lower your total cost is to save for a deposit.
Putting down a 10% deposit on a R1 million home (R100 000) will save you almost R1 000 a month – nearly R240 000 over 20 years.
If you save your future mortgage repayments in a contingency fund, you could build up a 15% war chest to cover your deposit and transaction costs within 15 months.
