The real cost of bad debt

Credit can be extremely valuable in achieving life goals such as paying for tertiary education, buying a car or providing a home for your family. However, it can quickly turn into a debt trap if we start to use it for day-to-day living on items we could easily save for.

What we don’t always realise is how much that debt is really costing us because there are many other fees in addition to the interest charged that make up the real costs.

The interest rates of registered lenders are regulated yet, for a short-term loan of up to six months, the credit provider can charge 5% per month which is equal to a rate of 60% per annum. For longer-term unsecured loans the maximum rate is 27.5% per annum.

Other fees include an initiation fee, service fee and credit life fee.

Assuming the lender charged the maximum allowed, which they usually do, if you had to borrow R2 000 for three months you would pay:

  • R300 interest
  • R302 initiation fee
  • R27 credit insurance
  • R204 service fee

You would pay a monthly installment of around R945 would pay back a total of R2 835 over three months. This means the loan cost R835 or nearly 42% of the amount you borrowed.

If rather than paying those installments, you saved R900 per month in a bank account offering a 5% interest rate, you would have R2 700 saved in three months and R6 380 in just six months.

To understand what your current debt is costing you, take out your statements and add up all the charges and interest you pay in a month and then multiply that by how many months you have had the loan. The figure will probably shock you – and hopefully convince you that it is time to start settling those debts and not to see another loan as a way out of your financial difficulties.

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