Ina Opperman

By Ina Opperman

Business Journalist

Considering applying for credit? You should read this first

Many consumers are increasingly turning to credit to make ends meet as interest rates stay high, but it is not a decision to take lightly.

Access to credit can unlock many opportunities, such as starting a side hustle, renovating your home, or even furthering your studies. However, the cost of borrowing money remains high and consumers should think twice before applying for credit.

Economic circumstances are tough and consumers are advised to equip themselves with the right information before committing to any form of credit, such as how interest rates affect the cost of borrowing money from financial institutions.

“Credit is an agreement to borrow money or buy goods or services with the promise to pay for it later, with interest. Interest on the other hand is twofold: it is the money that you can earn when you put your money into an interest-bearing savings or investment account, or it is the money that you pay for using credit to borrow money,” Pearl Cele, operations manager at FNB Consumer Education, says.

This means that a credit provider, such as a bank, financial institution or store, will charge you an additional amount for borrowing or buying goods on credit. In addition to the interest, there may be other fees, such as admin or service fees and initiation fees. These fees are known as the cost of borrowing.

Kinds of credit to choose from

These kinds of credit are available to consumers:

  • Loans: Borrowing money from a lender or a financial institution such as a bank and you pay the money back over a certain period, with interest. Loans can be short-term or long-term.
  • Short-term loans: These loans are usually for smaller amounts and have to be paid back within a short time frame, such as a personal loan.
  • Long-term loans: These loans are usually for larger amounts for more expensive items, such as a car or home. The loan term is longer, such as five years for a car loan or twenty years for a home loan.

ALSO READ: Know your rights and responsibilities regarding credit agreements

Accounts or instalments

Cele says this is where a retail store will allow you to buy a service or goods, such as clothes and furniture, on “account” but pay for them in instalments over a period of time, such as retail or store credit accounts. You usually have a limit for how much you can buy for and you repay in monthly instalments.

“Another example of credit accounts is hire purchase or lay buy (instalment sale) agreements, another form of credit where the shop allows you to take something and use it immediately and pay for it later or in instalments. This kind of credit can be used for buying items such as furniture or appliances and in some instances, cellphones.”

ALSO READ: How to navigate credit in a time of high interest rates and cost of living

She says financial institutions also use terms such as revolving credit to refer to this line of credit which allows you to borrow a certain amount of money up to a certain limit, known as a credit limit and repay it over time, usually on a month-to-month basis.

“You can borrow, pay and borrow again as long as you stay within the limit and make timely payments and interest is only charged on the amount you borrow. Examples of revolving credit include credit cards, revolving loans and store accounts. Generally speaking, revolving credit is more expensive as you pay a higher interest rate, than for example, long term loans for vehicles, although it is more difficult to qualify for a long-term loan.”

Difference between secured and unsecured credit

Cele says secured credit means the bank or the lender holds or accepts one of your assets as collateral in exchange for giving you the loan, such as your car or your home. “The person borrowing has to allow the bank to use one of their assets or sign that their asset can be used by the bank or lender as security.”

Examples of secured credit are home loans and vehicle loans. In cases where you do not repay the debt, the lender has the right to take possession of the asset and sell it to recover their loss due to your non-payment. This can be one of the risks or disadvantages with secured lending.

“Unsecured credit means the bank or the lender does not have any assets or possession to hold onto in exchange for giving you a loan. They take your promise that you will repay and also consider other factors, like checking your credit record to see how you have repaid loans in the past.”

They may charge slightly higher interest compared to secured lending, as you have not pledged or signed over any asset as security, Cele says. Examples are credit cards, personal loans and other short-term loans.

“While there are many types of credit available to alleviate the financial pressures in these tough economic times, we encourage consumers to equip themselves with the necessary information and to always get a quote before committing to any form of credit. We also urge consumers to not borrow more than they need and overly extend themselves but to borrow responsibly,” Cele says.

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