One of the main reasons we have a credit crisis in South Africa is that we never plan and save towards our goals, because it’s just easier to borrow. Change your dependency on credit by planning for those money moments and start saving for your short-term goals in a savings account.
The emergency loan
For most of us when we hit a crisis or unexpected expense, we have no choice but to put it on our credit card or take out a short-term loan. But the true cost of that loan is a further reliance on credit.
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 for 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!
How to save: 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.
The holiday/lifestyle loan
If you took out a one-year loan you would pay around 16% in interest and the impact of fees will 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.
How to save: If your goal is to go on holiday this year, or you have another planned large expense, create a proper budget to work out how much it will cost you. Then calculate how much you need to be putting away into your savings fund each month to reach that goal. If you saved R1 190 a month, you would have R10 000 in just over 8 months, saving you R4 280 in unnecessary fees.
The car loan
If you wanted to buy a car for R300 000 and finance it over 60 months you would pay around R6 500 a month in repayments. Over the period you would pay R390 000. This is a cost of R90 000 made up of interest and fees.
How to save: If you delayed your car purchase by just five months and invested the R6 500 into your investment account, you would have just over R32 500 saved for a great deposit. You could then select to finance the remaining R267 500 over 54 months. Not only does this drop your monthly installment to R6 300, but you save R18 000 in interest and pay your car off a whole year earlier!
The home loan
Although home loans have a lower interest rate than other types of loans, due to the length of the period you end up paying the same amount of interest to the bank as you spent buying the property!
How to save: The best way to lower your total cost is to save for a deposit. By putting down a 10% deposit on a R1 million home (R100 000) will save you almost R1 000 per month – nearly R240 000 over 20 years. Whilst you are thinking about buying a home, start saving the amount you would be spending on the monthly mortgage into a savings account. Within 15 months you could build up a 15% war chest to cover your deposit and transaction costs.
This post was sponsored by Nedbank.