Good loans vs. bad – choosing the right one for you

Even people who are very careful with money may need to borrow from time to time.

However, every loan you take out comes with a financial responsibility so you need to make sure you are borrowing for the right reason and understand the basics.

Not all loans are bad – home loans, student loans and loans to start a business are some of the instances when borrowing is good for your financial health. However, taking out a loan to finance your lifestyle, pay for day-to-day items or a holiday is not wise, as this will eventually catch up to you.

There are many different types of loans but they all have one thing in common, which is that they need to be paid back over a certain amount of time with some type of interest.

One of the most risky loans to take is from illegal informal money lenders, known as ‘mashonisas’, which is Zulu for ‘the people that take you down’.

“Loans from mashonisas may seem like an easy way to get money, but they are often very expensive. The interest rate is usually almost impossible to pay back and most people will find themselves in debt that they will never be able to recover from,” says Eunice Sibiya, Head of Consumer Education at FNB.

When considering a loan rather approach financial institutions which are regulated.

Loans from a reputable financial institute will come with a contract, which means that you are contractually obliged to pay it back at a certain time of month. Ensure that they are budgeted for and honoured.

“Make sure you shop around as well as consult several lenders and advisors. There are many different types of loans with different interest rates, so do your homework for the best deal,” says Sibiya.

Before taking a loan of any type, understand the terms and conditions and check the total cost of the loan. Make sure to look out for extra costs which include initiation fees.

“Stated in your contract should be the loan amount you have applied for, your repayment amount, interest, how long you have to pay it back, any additional fees and the total amount you will end up paying on your loan,” says Sibiya.

Read the document completely before signing and make sure you understand. This will reduce the chances of unwanted surprises later.

“Most importantly, borrow only what you need,” says Sibiya. “You shouldn’t be spending too much of your monthly salary on covering monthly loan repayments, remember you must still pay for your living expenses. Be financially smart.”