Weigh up the costs of loans

YOU’VE recently graduated as a professional and are stepping into the ‘big, wide world’.

You may be tempted to get carried away when loan offers start pouring in – which could potentially lead to financial mishaps.

Lynette Kloppers of FNB says the following four mistakes are often made, and should be avoided:

Needlessly using credit

Avoid mistakenly rushing into taking out a loan without first considering your needs and the most ideal way to finance them.

Being able to differentiate between ‘need’s and ‘wants’ will help you determine whether you need a loan or not.

‘For example, if you are planning to buy a kitchen appliance that you will only use once or twice in a year, it would be more economical to save up for it rather than using credit and having to pay interest,’ she says.

Using the wrong type of loan

There are many types of loans available in the market which can often be confusing for young consumers who are not adequately informed.

For example, if you run out of cash towards the end of the month, an overdraft facility can come in handy to ensure that important debit orders such as a home loan or insurance premiums are honoured.

Moreover, pre-funding your credit card with your salary and using it for all your daily purchases could be quite beneficial as it unlocks higher loyalty rewards and value added benefits.

You also get access to a credit facility with up to 55 days interest free to pay off, without incurring interest.

Alternatively, taking out a long-term loan to supplement your monthly budget could potentially end up costing you more.

Not understanding the full cost of the loan

It is essential for consumers to be fully aware of the total cost of servicing the loan, as well as the total interest they are required to pay back.

Having this information upfront will help to determine if they will be able to cope with the additional financial commitment, while still being able to put money away for emergencies or long-term needs on a monthly basis.

Not paying attention to the Ts and Cs

When entering into a loan agreement, it is essential to read and understand the terms and conditions to avoid costly surprises.

For example, many graduates who are eager to buy the car of their dreams often agree to a residual or balloon payment without really understanding what it means, only to realise they need to pay a lump sum at the end of the finance term.

‘Getting to grips with different types of loans and how to use them effectively in line with your personal financial plan at a very young age can help you build a solid financial future,’ says Kloppers.

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