Different types of Credit or Debt

There are different types of credit or debt, and it is important that you aware of this, so that you can make the best financial decisions for you and your family.

In South Africa, there are 2 major types of debt/ credit agreements – secured and unsecured.

What is unsecured debt?

With unsecured debt, you don’t need any security or collateral to apply for this type of loan.

Retail store accounts, personal loans, credit cards, overdraft facilities and vehicle finance – are all examples of unsecured debt.

What is secured debt?

A home loan is an example of secured debt. If you have a home loan with a bank and you don’t repay the loan as per the credit agreement, then the bank has the right to repossess the asset (house).

Different types of debt

Personal loan: With a conventional personal loan – usually the larger the amount, the longer the term. Interest rates on personal loans with registered creditors and money lenders – are normally in the region of 3% to 30%.

Payday loans: These short term loans are normally taken to get consumers through to their next pay-day. The repayment term depends on how long before your next wage/ salary date you get the payday loan. Whilst these loans can help you out of a bind, they are expensive as interest rates are high.

Consolidation loans: This is one loan amount taken to cover multiple debts. Essentially, you have one big debt, paying off smaller debts. You have to do your calculations very carefully here, as these loans also come with quite large initiation fees, admin fees and long terms of repayment.

Vehicle finance: A vehicle finance credit agreement normally has a repayment term of between 36 and 72 months. The longer the term, the lower the installment, but the more the final interest and overall amount paid back. Vehicle finance also comes with the option of a balloon payment. With this, the monthly installments are less, but there is a hefty lump sum to be paid at the end of the term.

Home loans: Most home loans require at least a 10% deposit. Many people have found the housing market of 2020/ 2021 to be quite favourable to the buyer, since interest rates are low.

However, it might be a good idea to opt for a fixed interest rate, so that you can better plan your monthly expenses and not be surprised by higher repayments when interest rates rise.

Tips

• Make sure that you know what is reflected on your credit report. There is practically no use in applying for a loan if you have a credit report filled with judgements and bad payment history.
• Make sure that you know the interest rate, the repayment term and monthly installments of the new debt you are signing for.
• Make sure that you have loan protection insurance in the case of death, disability and retrenchment.

National Debt Advisors does not offer different types of credit or debt. We do however provide a comprehensive NCR regulated debt management solution called debt review.

If you are struggling with your monthly debt repayments – make contact with us today. Through the process of debt review, all your debt repayments will be consolidated into one lower, monthly debt installment, your assets will be safe from repossession and you will have more money available for everyday necessities.

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