Video: How much does your debt cost?

Have you ever wondered how much your debt is actually costing you? It is probably a lot more than you realise by the time you have included all the interest and fees payable.

If you borrow for less than six months, the microlender can charge up to 5% interest a month, which works out at an annual rate of 60%. They can then include an initiation fee, monthly service fee and credit insurance.

So, if you borrowed R10 000 over four months, you would pay back:

  • R1 430 in interest
  • R1 150 initiation fee
  • R276 in monthly service fees (R69 per month)
  • R180 in credit life premiums (R45 per month)

Your monthly installments including all fees would be R3 258 paying a total of R13 032 over four months. That loan cost you over 30% of the amount you borrowed!

If you had rather saved the installment of R3 258 each month, then you would have R10 000 saved within three months. So, just by planning ahead for your needs and saving instead of borrowing you would save yourself over R3 000.

If you took out a one-year loan, your interest rate would be lower as longer-term unsecured loans are capped at 27.75% per annum. But even if you qualified for a 16% rate, the impact of the fees will still result in a significant cost.

If you borrowed R10 000 over 12 months you would pay R1 190 a month, paying back a total of R14 280, or 42% of what you borrowed.

If you saved R1 190 a month in a money market account earning 5%, you would have R10 000 in just over eight months, saving you R4 280 in unnecessary fees.

The longer you borrow for, the more it costs. On a two-year loan, that R10 000 even at 16% per annum, will cost you a total of R16 176 – or 61% more than you borrowed. That is over R6 000 spent on interest and fees.

Short-term borrowing is a wealth destroyer. So why borrow when you can plan and save?

   

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