Key things to consider before committing to credit

ACCESS to credit can unlock many opportunities like starting a side hustle, renovating your home, or even furthering your studies.

However, the cost of credit continues to go up due to the high interest rates. In this tough economy, consumers are advised to equip themselves with the right information before committing to any form of credit. For example, 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 you can earn when you put your money into an interest-bearing savings or investment account, or it is the money you pay for using credit (for borrowing money).

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

Here are some of the different forms of credit available:

Loans – borrowing money from a lender or a financial institution such as a bank; you pay the money back over a certain period, with interest.

Credit accounts/instalments

This is where a retail store will allow you to get a service or goods (clothes, furniture, etc) on credit or “account” but pay for them in instalments over a period. For example, retail credit or store credit accounts. You are usually given a credit limit of how much you can buy for, and make repayments in monthly instalments.

Another example of credit accounts is hire purchase/lay-by (instalment sale agreement) – a of credit where the shop allows you to take something and use it immediately and pay later or in instalments. This kind of credit can be used for buying items such as furniture, appliances or cellphones.

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 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 credit 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 (it charges a higher interest rate) than, for example, long-term loans (vehicle loan), but the latter can be more difficult to qualify for.

Secured and unsecured credit

Secured credit means the bank or the lender holds or accepts one of your assets as collateral in exchange for giving you the loan – like 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. Some examples of secured credit are home loans and vehicle loans.

In cases where you default (you fail to repay the debt), the lender has a right to take possession of the asset in order 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 doesn’t have any assets or possession to hold onto in exchange for giving you a loan. They take your promise that you will repay and they 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. Examples of unsecured credit 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.