The cost of credit

BORROWING: READ THIS BEFORE YOU APPLY

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 credit 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,” says Pearl Cele, operations manager at FNB Consumer Education.

This means that a credit provider, will charge you an additional amount for borrowing or buying goods on credit.

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 20 years for a home loan.

Credit accounts/ instalments

Cele says this is where a retail store will allow you to buy a service or goods, such as clothes and furniture, on credit or “account” but pay for them in instalments over a period of time.

You usually have a credit 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 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,” says Cele.

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.

“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.”