Scared of being in debt? These are the debt traps you should avoid

Living in debt is a very unhealthy burden which affects every aspect of people’s lives. The more debt an individual or family accumulates, the more it affects present and future financial security. Here are some debt traps you should try to stay away from.

Credit cards

Banks have made it extraordinarily easy for you to use a credit card to buy just about anything you want. While credit cards provide you with some sort of convenience and the security of not carrying cash, the downside is that credit cards come with high interest rates on unpaid debt and often tempt holders to impulse buy leading to debt. It is also important to remember that credit card debt is unsecured debt – in other words, you do not have to provide any security for it and that means higher interest rates.

Hire purchase

Hire purchase, like many other kinds of debt, is aimed at encouraging you to buy now and pay later. Interest rates on hire purchase contracts tend to be higher than the prime overdraft rate of interest, even though the marketing material often claims that you will pay very little in total repayments a month. You should always add up all the amounts (capital and interest) you will pay every month until the debt is repaid, and then compare that amount with the actual price of the item. You could find yourself paying two to three times the actual cost of the item.

Loans from micro-lenders

The first thing you need to find out, if you plan to use a micro-lender, is whether or not the lender is lending money in terms of the Usury Act or is exempted. In terms of the Usury Act, interest is limited to 26 percent on loans of up to R10 000 and 29 percent on amounts over R10 000. Micro-lenders who are exempt can charge what they want – and they do. They are supposed to fully disclose to you what you will have to pay, but often the facts are disguised or kept in the small print.

Leasing

Leasing has become a very popular way to finance motor vehicles. Be particularly wary when you see promises of incredibly low repayments on a motor vehicle. This is made possible by what is called residual value financing. As a general rule, any residual over 40 percent of the initial purchase price is too high and will result in you having to pay in more at the end of the contract than the resale value of the vehicle. To avoid ending up owing the bank more than you could get by selling the car, you could opt for a buy-back contract with a motor dealer, who guarantees to buy back your vehicle for a certain value after a set time, provided you have not clocked up more than a specified number of kilometres.

Unsolicited loans

Unsolicited loans quite often come at interest rates close to the maximum permitted under the Usury Act. What most unsolicited loan providers fail to point out to you, is that there may be other cheaper ways of borrowing money, such as extending your home loan or borrowing against a life insurance policy. If you are offered an unsolicited loan, you can be almost sure it will come at a high interest rate.

Staying away from the above listed debt traps will assist you to enjoy a healthy financial life.

  AUTHOR
Caxton Central

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