Learning finance

It is essential that young people are made aware of the pitfalls of credit agreements

“It is important to make people aware from an early age of the pitfalls of credit contracts and that they understand the different types of debt to lead to better decision-making over the long term”, according to Sébastien Alexanderson, the founder and debt adviser. at National Debt Advisors (NDA).

Retail bank FNB recently revealed that credit-active middle-income consumers spend an average of 30% of their income on unsecured credit and 35% on secured credit.

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Alexanderson said that to create a debt-savvy future generation, it’s essential that young people are educated as early as possible about the long-term dangers of bad debt behavior.

“Unfortunately, the indebtedness of our young people is already on a constant slope. Receiving credit from credit grantors is a fairly easy task and often leads to excess debt if not maintained responsibly. A study by Eighty20 showed that around 20% of South Africa’s 1.2 million young people between the ages of 18 and 24 were active in credit. In addition, student debt would have reached 16.5 billion in March 2022.

Carla Oberholzer, Public Relations Advisor at DebtSafe, said young South Africans face varying expectations and realities when it comes to finances, money, income and investing/savings.

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“If you look at the current reality they face and the family setup – we can see that various young people are part of the ‘failure to launch syndrome’ where they may have an academic qualification/skills but have to stay with their parents or family members because they haven’t found a job, as South Africa faces high unemployment,” Oberholzer said.

She said that in some cases, various young people were part of the sandwich generation – where they had to take care of various family members, which put a strain on household finances – say for example a young married couple.

“Pressures arise/not being patient enough…to have everything all at once – a car, a house, being able to provide money to family members – showing that they have a successful/misleading idea of ​​having a job/money…. all of this adds to the stress and conflict that our youth and youth can experience.

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There were two main debt or credit agreements – secured and unsecured. Secured debts, such as home loans and vehicle financing, involved posting an asset as collateral in case one cannot make the payments, in which case the lender can take your asset. Secured debt tends to have better terms that save money while being responsible for risk.

Unsecured loans, such as retail accounts, personal loans, credit cards and overdraft facilities, meant less risk for the consumer because the lender was liable, but would be charged for this luxury.

With a personal loan, the larger the amount lent the longer the payment term will be, and if taken with registered creditors and lenders the interest rates for these loans were normally around 3 at 30%.

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Payday loans have been structured over a short term period and help you get to the next payday. The repayment terms for these depend on how long until the next payday/salary date to get the payday loan. Although these loans can help you get out of a bind, they are expensive because the interest rates are high.

A consolidation loan referral was taking a loan amount to cover multiple debts. Basically, here, we have a big debt, paying off smaller debts.

Alexanderson said it was important to do very careful calculations here, as these loans also come with significant initiation fees, administration fees and longer repayment terms, which could end up costing more. expensive than the debt itself.

A car financing credit agreement normally has a repayment term of between 36 and 72 months. The longer the term, the lower the payout, but on the other hand, the long term would equate to a higher overall amount repaid. “Auto financing also comes with the option of a lump sum payment. With that, the monthly payments are lower, but there is a significant lump sum to pay at the end of the term,” Alexanderson said.

Home loans generally require a deposit of at least 10% to secure the loan.

He said it’s a good idea to go for a fixed interest rate on a home loan, to better plan his monthly expenses and not be surprised by higher repayments when interest rates rise. .

The final type of loan was a student loan, which covered higher education costs and included textbooks and housing, which ultimately added up. Normally, one has to repay the monthly interest on the loan while in school and start repaying the loan in full once one has found a job.

“This is a serious problem for our educated young people. Before they even start earning a salary, they owe a huge amount of debt, which prevents them from successfully saving money,” Alexanderson said.

He advised young people to make sure they knew what was reflected on their credit report. A credit report is a detailed and objective record of all your credit transactions that is used to determine credit score.

He said it’s virtually pointless to apply for a loan if one has a credit report full of judgments and a history of bad payments.

The young person must ensure that he knows the interest rate, the repayment period and the monthly payments of the new debt he contracts. They must also ensure that they have credit life insurance in the event of death, disability and redundancy.

Alexanderson said as South Africans become increasingly dependent on credit to make ends meet, young people’s spending priorities need to change.

“Young people should be encouraged to live within their means and must learn to have a better relationship with money to be able to build a secure future for themselves and for our economy.”