In a perfect world everybody would have a ‘rainy day fund’, catering for unforeseen circumstances such as medical expenses, home improvements or educational expenses. However, we live in a world where the vast majority of people make use of credit in some form or other. This is why Hippo.co.za decided to compare three different credit facilities, namely credit cards, personal loans and payday loans, to see both the advantages and disadvantages of each.
The credit card facility is known as ‘revolving credit’, meaning you don’t have to pay the full balance by a set time-period – all you need to pay is the minimum payment for that particular month and this payment will be subtracted from the total unpaid balance. Credit cards are probably the most popular credit product, seeing as they allow you to use the same credit line over and over again, as long as you keep paying off the money borrowed.
However, credit cards can also become the basis upon which someone becomes financially insolvent. Consumers should only apply for credit cards if they can at least pay the minimum amounts.
Talking to an actual consumer, Running Wolf’s Rant’s own Henno Kruger, says that he decided to get a credit card as he earned enough at the time to make the monthly payments: “The fact that I’ve also had a good credit record counted hugely in my favour […] The repayment amount and instalments are reasonable, but I would recommend a credit card only to people who are not prone to overspending. If you manage your credit card repayments and instalments, and control your spending, it’s actually very useful – especially if you want to buy stuff online.”
Unlike credit cards, personal loans are known as ‘unsecured credit’, meaning you’re not leveraging your property, vehicle or other assets as security against the money being borrowed. Personal loans are also usually fixed-term loans, meaning that the instalment paid each month is consistent for the number of months or years throughout the loan’s existence. The interest rates for personal loans also tend to be far lower than other credit facilities because ultimately personal loans are usually high monetary amounts and the duration of payment is much longer. As with other credit facilities, with personal loans, it’s best that you’re sure that your current income can finance the fixed payments each month. If not, try aiming for a lower amount than the one you initially tried to borrow.
Payday loans are possibly the most dangerous of the three to deal with because they involve borrowing a lump sum amount which then has to be repaid in full the following month. In addition to interest, credit providers of payday loans are allowed to charge an initiation fee and a monthly administration fee of up to R54. The cost of a payday loan works on the premise that you will have access to another unencumbered lump sum only one month later. Paying off such a loan would require median, sometimes major changes in expenditure for the pay-off month, so anybody who takes a payday loan should be ready to sacrifice or have another plan for getting the money. Payday loans should be looked at with a very discerning eye.
Generally, the three forms of credit facility have their own advantages and disadvantages and it’s up to you as the consumer to get clued-up on which form of credit is best for you. Most accredited credit providers have staff who are trained to answer your questions – so ask them. Rather put forward a question or two than lose money in the long run.
DISCLAIMER: The views expressed in this article are for informational purposes only, and should not be seen as financial advice.