If you want to make a truly informed decision when applying for credit, it’s vital you ask your credit provider for a quotation or a pre-agreement that outlines all of the specific fees and costs you will be obligated to pay under the credit agreement. Another essential issue to address is whether or not these charges will be included in your monthly instalment, or if they are actually additional to this payment.
Below you will find descriptions of the kinds of charges you can expect to find in a standard pre-agreement, which have been broken down to help you better understand what you are actually getting yourself into, when you sign that contract.
Depending on the credit agreement in question, the NCA allocates the maximum percentage of interest a credit provider may charge you, to ensure that your consumer rights are protected.
The best way to find out if you aren’t being over-charged is of course to consult a financial advisor, or at least someone you trust who has sound financial knowledge. Ask this person to read through the agreement as an extra precaution, as they will be able to spot anything untoward in the fine-print that you may not.
Interest can be described as the fee you pay for ‘borrowing’ money. The amount you’ll be charged is always a certain percentage of the principal amount that you borrowed.
Your credit providers should always give you the option of paying a once-off initiation fee – upfront, with no interest. This means you pay a certain amount at the very beginning to enter the contract, so you won’t have to pay any interest on it in the future.
If you pay the initiation fee a few months down the line after taking out the credit, you will be charged interest on it and the longer you wait to pay the fee, the higher it will get.
It really is critical that you from the get-go clarify when and what you will be paying in terms of the initiation fee, so your credit providers don’t end up demanding hidden costs from you that you weren’t aware of.
Your credit providers will also charge a service fee for administering, servicing or maintaining the credit agreement you enter into with them. Remember that you will have to pay this fee either every month or year, or every time you make a transaction on this account i.e. draw money from an ATM or swipe your credit card.
Ensure that you factor this service fee into your budget, when you are working out how much credit you can afford to take out, without putting yourself into a risky, stressful situation, where you can barely afford to cover your basic living expenses.
If you are applying for home or vehicle finance, your credit providers may require that you take out insurance to cover these assets, in case they are damaged.
If you haven’t got insurance on these assets, your credit provider may offer you some and, of course, this will come at an extra cost. Just make sure you are happy with this additional fee and that it’s not unreasonably high, by comparing it with other insurance companies’ charges. The golden rule is to always shop around, before committing yourself!
Credit Life Insurance
For some credit agreements, you may have to take out credit life insurance, which is a precautionary measure that some credit providers take to ensure that your debts will be settled, should you pass away, become disabled or be retrenched – and find yourself unable to pay in your instalments.
Always check to see which type of event you are actually being covered for i.e. if it pays out in the event of retrenchment, death, disability, so you know exactly what you are paying for and can gauge how reasonable or necessary it is in your case, to cover any of these.
Again, go out and get quotes from various credit providers, so you can find the best rates possible, and opt for the kind of cover that suits your particular needs or concerns, in this way you’ll know you’re getting what you’re paying for.
Lastly, appreciate the gravity of this commitment. This a serious life decision, with severe implications, so don’t be shy to ask every single question niggling away at you, before signing the pre-agreement. Even better, bring a friend or family member along, who has a financial background/education, knowledge or experience with taking out credit, and all that it entails.
That way, both of you can give your credit providers the third degree, before you sign an agreement that has the capacity to turn your entire life upside down.