Educating the youth about the pitfalls of debt
South Africans have a bad track record
It’s no secret that South Africans don’t have a great track record when it comes to debt. Retail bank FNB recently revealed that credit-active middle-income consumers spend on average 30% of their income on unsecured credit and 35% on secured credit.
To create a future debt-savvy generation, it is critical that young people are educated as early as possible about the longterm dangers of bad behaviour regarding debt.
Unfortunately, debt among our youth is on a steady incline.
A study by Eighty20 showed that about 20% of the 1.2 million South Africans between the ages of 18 and 24 are credit active. Additionally, student debt has reportedly risen to R16.5-billion as of March 2022.
It’s important to educate people from a young age about the pitfalls of credit agreements and for them to understand the different types of debt.
Different types of credit or debt
There are two major debt or credit agreements – secured and unsecured.
Secured debt, such as home loans and vehicle financing, involves you having to put down an asset as collateral in case you can’t make your payments, in which case the lender may take your asset. Secured debt tends to have better terms that allow you to save money while being responsible for the risks.
Unsecured loans, such as retail accounts, personal loans, credit cards and overdraft facilities, mean less risk for the consumer as the lender is liable but you will be charged for this luxury.
With a personal loan, the larger the amount loaned, the longer the payment term will be, and if taken with registered creditors and money lenders, the interest rates for such loans are normally about 3% to 30%.
Pay-day loans are structured over a short-term period and assist you with getting to your next
pay day. These loans are expensive as interest rates are high.
A consolidation loan refers to taking one loan amount to cover multiple debts. Essentially, you have one big debt, paying off smaller debts. It’s important to do your calculations carefully here as these loans also come with large initiation fees, administration fees and longer
repayment terms, which might end up costing more than the debt itself.
A vehicle finance credit agreement normally has a repayment term of between 36 and 72 months. The longer the term, the lower the instalment, but the longer term will amount to a higher overall amount paid back. Vehicle finance also comes with the option of a balloon payment. With this, the monthly instalments are less but there is a hefty lump sum to be paid at the end of the term.
When it comes to home loans, most require a deposit of least 10% to secure the loan. It’s a good idea to opt for a fixed interest rate on a home loan so that you can better plan your monthly expenses and not be surprised by higher repayments when interest rates rise.
The final type of loan is a student loan, which covers tertiary education costs, and includes your textbooks and accommodation, which all adds up in the end. Normally you must pay back the monthly interest on the loan while you are studying and start paying back the loan in its entirety once you get a job. This is a serious issue for our educated youth. Before they even start earning a salary, they owe a huge amount of debt and this makes it impossible for them to save money successfully.