Financial Literacy for Everyone
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How to borrow responsibly

Debt itself is not bad if you borrow responsibly and use debt to achieve your long term goals.

To borrow responsibly means the following:

  • Borrow only what you can repay.
    • Make sure you understand exactly what it means if you borrow money. You must ask the creditor to give you all the information. The creditor must give you all the information in language that you can understand.
    • Understand what you sign.
    • If you do not understand, ask the creditor before you sign anything.
    • Budget for repayments.
  • Pay debts on time.
  • Tell your creditor if you cannot pay and make a new arrangement with your creditor.
  • Report lost or stolen credit cards immediately.
  • Never give your credit card number over the phone unless you called the person, or know exactly who you are talking to. The reason why you have to protect the safety of your credit card is because you also borrow money on a credit card. If you do not inform the bank when your card is lost or stolen, you will be responsible for any money stolen from your card.

Before you borrow money:

  • Remember it is cheaper to repay loans over a shorter period.
  • Ask what the interest rate is and work out what this means for you.
  • Compare interest rates.
  • Look at the small print, which explains all the terms and conditions.
  • Remember that interest rates could change and your instalment could increase.
  • Calculate extra costs like administration fees into your instalment.

Your rights as a borrower:

The National Credit Regulator (NCR) ensures that all companies who lend money to people obey the National Credit Act. All companies lending money to people must be registered with them. You should ask creditors for their NCR registration number.

According to the National Credit Act, a borrower has the right to:

  • A clear and understandable credit agreement.
  • A quote and information about the agreement five days before you have to sign.
  • Information about the loan that tells you exactly what all the costs would be.
  • If an application has been turned down, you have the right to know why.

Also:

  • Companies offering and selling you loans should respect your time and privacy while you are at work or at home.
  • Creditors may not automatically increase your credit limit.
  • Creditors may not ask any interest they want on loans. This also applies to micro lenders or Mashonisas.
  • Credit bureaux are regulated. You can get a free update on your credit status once a year.
  • When you are over-indebted, people like debt counsellors are available who can assist you. You will have to pay them for this service.
  • When you are over-indebted, your creditors must be prepared to negotiate with you.

The Financial Services Board is an organisation that regulates all non-banking financial services. These include insurance providers, financial advisers and retirement funds. The aim of the Financial Services Board is to protect consumers.

If you feel that your rights as a borrower have been violated, there are a number of Ombuds that you could contact. Refer to the "Resources" section under the heading "Debt" for a list of contact details.

How much to borrow

If you really want something, the best plan would be to save for it rather than to borrow to buy it. Saving is less expensive, and there is no risk, such as with a loan, that you may not be able to pay back the money and get a bad credit record.

If you do decide to take a loan, you should budget carefully before taking the loan. Budgeting will help you to know what would be the maximum monthly instalment you can afford. This instalment will determine how big a loan you can take out. You should also make sure that you can afford a higher instalment if interest rates increase while you are still paying back the loan.

Almost everybody in today's world borrow money for some things. If you manage your loans well and can easily pay the instalments, it should not cause you problems.

It is best to not spend more than 10% of your income on the repayment of debt. This 10% should be the sum of all your debt repayments (except your home loan).

Here is an example of an affordable loan repayment from Lesedi's budget:

Income
Part-time work R500
Pocket money R500
TOTAL INCOME R1 000
Expenses
Savings R100
School lunch R400
Cellphone airtime R150
Transport R200
Store account payment R100 (10%)
TOTAL EXPENSES R950

If you have calculated that you can afford a loan and would like to know more about the loans mentioned above, ask the bank or the shop. Ask them to explain exactly what it means in simple and understandable language to you.

Norma's budget is an example of a loan repayment that is higher than the recommended 10%:

Income
Part-time work R500
Pocket money R500
TOTAL INCOME R1 000
Expenses
School lunch R300
Cellphone loan R100 (10%)
Cellphone airtime R150
Transport R200
Store account payment R250 (25%)
TOTAL EXPENSES R1 000

Understanding loans

One of the reasons why people have problems with debt is because they do not understand the effect that interest rates, loan terms and loan amounts could have on loan repayments.

The amount that you borrow is not the amount you are going to repay: you will pay more than the original amount you borrowed, because you also have to pay interest on the loan.

What do you pay if you buy something on credit?

Imagine you see a brand new flat screen television set that is on a once-in-a-lifetime special and costs only R5 000. However, you have not budgeted and saved for it, therefore you start looking for a loan. If someone lends you the money and charges a monthly interest of 12% and you have to pay it back after four months, how much have you paid in total? Remember that you have to consider the original amount plus interest.

Work out how much the television set would cost if you borrowed R5 000 for four months at 12% interest per month. You have to pay back the total loan amount plus interest at the end of Month 4.

You can calculate it as follows:

Month 1
R5 000 X 12% = R600 + R5 000 = R5 600
Loan amount Multiply Interest rate Equals Total interest amount Plus (add) Loan amount Equals Total loan amount at the end of Month 1
Month 2
R5 600 X 12% = R672 + R5 600 = R6 272
Loan amount at the end of Month 1 Multiply Interest rate Equals Total interest amount Plus (add) Loan amount Equals Total loan amount at the end of Month 2
Month 3
R6 272 X 12% = R752,64 + R6272 = R7 024,64
Loan amount at the end of Month 2 Multiply Interest rate Equals Total interest amount Plus (add) Loan amount Equals Total loan amount at the end of Month 3

Work out month 4 using the formula:

Month 4
R X % = R + R = R
Loan amount at the end of Month 3 Multiply Interest rate Equals Total interest amount Plus (add) Loan amount Equals Total loan amount at the end of Month 4

Now, is it still a bargain if you borrowed the money? The R5 000 television set costs R7 867,60 after four months at a monthly interest rate of 12%.

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