“It is important to educate people from a very young age about the pitfalls of credit agreements and for them to understand the different types of debt to lead to better decision making in the long run,” according to Sebastien Alexanderson, the founder and debt counsellor at National Debt Advisors (NDA).
Retail bank FNB recently revealed that credit-active middle-income consumers spend, on average, 30 percent of their income on unsecured credit and 35 percent on secured credit.
Alexanderson said to create a future debt-savvy generation, it was critical that youth were educated as early on as possible around the long-term dangers of bad behaviour regarding debt.
“Unfortunately, debt amongst our youth is already on a steady incline. Receiving credit from credit providers is a fairly easy task, and often leads to excess debt if not maintained responsibly. A study by Eighty20 showed that approximately 20 percent of the 1.2 million South African youth between the ages of 18-24 were credit-active. Additionally, student debt has reportedly risen to 16.5 billion as of March 2022.”
DebtSafe public relations officer debt adviser Carla Oberholzer said South African youngsters were confronted with various expectations and realities when it came to finance, money, income and investments/savings.
“If you look at the current reality they face and family set-up – we can see that various youngsters are part of the ‘failure-to-launch syndrome’ where they might have an academic qualification/skills but need to stay with their parents or family members due to not finding a job, since South Africa is facing a high unemployment rate,” Oberholzer said.
She said in some cases, various youngsters were part of the sandwich generation – where they needed to take care of various family members, which put a strain on the household finances – say for example a young, married couple.
“Pressures arise/not being patient enough… to have everything in one go – a car, a house, being able to provide some money to family members – showing that they have a successful/misleading idea of having a job/money…. it all adds up to the stress and conflict our youngsters and youth can experience.”
There were two major debt or credit agreements – secured and unsecured. Secured debt, such as home loans and vehicle financing, involved having to put down an asset as collateral in case one could not make payments, in which case the lender may take your asset. Secured debt tended to have better terms that allow one to save money while being responsible for the risks.
Unsecured loans, such as retail accounts, personal loans, credit cards and overdraft facilities, meant less risk for the consumer as the lender was liable, but would 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 were normally in the region of 3 percent to 30 percent.
Payday loans were structured over a short-term period and assist you with getting to the next payday. The repayment terms on these depend on how long before one’s next wage/salary date they get the payday loan. While these loans can help you out of a bind, they are expensive as interest rates are high.
A consolidation loan refer was taking one loan amount to cover multiple debts. Essentially, here one has one big debt, paying off smaller debts.
Alexanderson said it was important to do calculations very carefully here, as these loans also came with large initiation fees, admin 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 on the flipside of that was that the longer term would 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”, Alexanderson said.
Home loans mostly require at least 10 percent deposit to secure the loan.
He said it was a good idea to opt for a fixed interest rate on a home loan, so that one could better plan their monthly expenses and not be surprised by higher repayments when interest rates rise.
The final type of loan was a student loan, which covered tertiary education costs, and included textbooks and accommodation, which all added up in the end. Normally one must pay back the monthly interest on the loan while 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,” Alexanderson said.
He advised the youth to ensure that they knew what was reflected on their credit report. A credit record is a detailed, objective account of all your credit transactions that is used to determine the credit score.
He said there is practically no use in applying for a loan if one had a credit report filled with judgments and bad payment history.
The youth must make sure that they knew the interest rate, the repayment term, and monthly instalments of the new debt they were signing up for. They must also make sure that they have credit life insurance in the case of death, disability, and retrenchment.
Alexanderson said as South Africans become increasingly reliant on credit to make ends meet, the spending priorities amongst the youth need to change.
“Young people should be encouraged to live within their means and need to be taught how to have better relationships with money to be able to build a secure future for themselves, and for our economy.’’
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