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Further Loans

Further Loans: Is It A Good Idea?

The repo rate was raised again in April, bringing the total increase over the past twenty months or so to 450 basis points. After the April MPC (Monetary Policy Committee) meeting, there was precious little in the speech made by Tito Mboweni - Governor of the Reserve Bank, that indicated that the situation was going to change for the better over the next six months. He made it clear that in spite of the slight recovery of the Rand currency, food inflationary pressures were still on the increase worldwide and that the price of crude oil is set to remain a wild card in the South African economy.

Considering that we may not have seen the end of interest rate increases, you have to be very careful about the type of debt you take on during this time.

Red Light Loans: Loans To Avoid

Loans taken to pay for retail purchases (store cards, credit cards, overdrafts etc.): This covers pretty much anything you can buy in a retail store: clothing, furniture, electronic equipment, and entertainment systems. Instead of opening yet another retail account, save for the item you need before buying.

Loans taken to pay for intangibles like spa treatments, personal development seminars, luxury holidays and weekend getaways (credit cards, personal loans, overdrafts etc): If you cannot afford to pay cash, don’t. The last thing you want is to end up defaulting on something intangible, which could result in something tangible being attached by your creditors.

Loans taken to pay for consumables (credit cards, store cards, overdrafts etc): Securing a credit card or an overdraft facility to buy food has never been a good idea, and should be avoided now more than ever. To overcome this, you will need to change your shopping habits. Sit down once a month, plan your menu for the next four weeks and then go out and buy all your non-perishables in one go. By doing this you will inadvertently save on those impulse purchases you would normally make when popping into the local food retailer every afternoon on the way from work.

Orange Light Loans: Sometimes Safe Loans

Car Loans: Vehicle finance is quite a bit more expensive than it was before due to the higher interest rates. If you absolutely have to replace your car right now, make sure that you will be in a position to afford your down payments should the interest rate creep any higher.

Personal Loans: Personal loans in general are a no-no right now. One of the very few exceptions is when you wish to consolidate your high interest bearing debts into a single low-interest personal loan.

Credit Cards: Credit cards are not inherently bad. They are only bad for you if you succumb to spending binges or if you fail to settle the full balance on your credit card at the end of every billing cycle. If you find yourself in a bind, you could consolidate all your credit card debt into a single low interest credit card, such as the one offered by Virgin Money.

Overdrafts: An overdraft could be a helpful facility during emergencies and should not be viewed as part and parcel of your monthly income. The unwary could end up living on their overdrafts only, if they don’t heed the danger signs early on. If you find that you are battling to make ends meet, draw up a budget and stick to it.

Second and Third Mortgages: Taking out a second or third mortgage on your property is only okay if you want to improve your property and – with certain reservations - if you want to use the low interest rate on a mortgage for debt consolidation purposes. Second and third mortgages should never be used to supplement your income, least of all now.

Green Light Loans: Generally Safe Loans

Mortgages: A mortgage is one of the only ‘safe’ loans when the economy is off-colour, mostly because it is underpinned by a tangible asset that grows in value over time.

To conclude

Before you secure an additional loan, perform a sanity check first: Is a further loan really necessary? Can it wait? What are the alternatives?

If it turns out to be essential, shop around for the best possible interest rate and carefully calculate whether you will be able to continue meeting the down payments even if the interest rates had to increase again over the next twelve months.

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