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Friday, 28 October 2016 00:00

Debt (Part 1 of 2) – The True Cost

Welcome to the first part of the second blog edition of my 3 part Blog Series, 1-2-3 of Finance. Today we will be looking at the true cost of debt. World Bank data reflects that 86 % of South Africa’s population are indebted. Debt affects all South Africans.

There are many reasons why we get into debt. One of them is, even with the National Credit Act, it is actually quite easy to get credit. I read a story the other day, where a university student was given a street wise two with a credit card, the limit was only R500 but it is still enough to get them to start spending R500 they didn’t have. You can apply for a credit card or personal loan by visiting your bank and the one that most of us can relate to is unsolicited SMS messages and cold calling.

 

I think that the main reason why we get into debt though is because we want to get things now instead of saving towards it. For example, we see something we want and we immediately buy it on credit and the debt gets added onto our clothing account. We then pay this off over the next few months as opposed to saving up and then buying it cash. We might go into debt to purchase furniture and household appliances or we want to study a short course online and all these debts add up into monthly debt instalments. Now I understand that there could also be some unforeseen circumstance that has plunged us into debt but generally, most people are in debt because of their choices.

 

Let’s look at the cost of debt. We understand that if you borrow you have to pay it back with interest. For example, if we buy a flat screen TV today and the purchase price is R9 599.99 cash, and you purchase it on account over a repayment period of 36 months at an interest rate of 24%, you actually bought the TV for R23 388.00.You actually paid for 2 and 1/3 TVs and only got 1 in return. Debt repayment instalments come at a very high cost.

 

 

That is just one example of the total cost of credit, so if we have a few accounts everywhere, think of all those extra amounts that we are paying back each month. Now imagine you had all that extra money to spend each month instead of paying it to someone else.

 

Another thing to consider is the interest rate charged on your debt might not be a fixed amount which means tomorrow, due to inflation and economic changes; your monthly instalments will increase as you will repay the debt amount plus the new additional interest percentage. That means that which you could afford at the current interest rate might not be affordable tomorrow and put you into over-indebtedness.

 

A good example of this is the bond on your house, which is linked to the SARB Repo Rate. The interest rate has gone up approximately 2% over the last 5 years. This means if you had an R1 million house at an interest rate of 8.5% in 2011 you only paid R 8 678 bond instalment. Today you will be paying R 9 984 instalments on the same house as the interest rate has increased.

Next week we will look at how to tackle debt and show some easy steps that will help you work towards becoming debt free.

If you have a story on how debt has affected you I would love to hear from you. Please drop a comment in the comments section below.

 

Author Ben Charlton

Edited by N Du Preez (Business Internet Marketing Solutions)

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Ben Charlton

A financial planner can be someone who sees you as a number; they sell you the product that works best for them, they do exactly what you ask for, no more and no less. We are not like that, to us, our job is not to sell you a product, it’s to help you realise your dreams.

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