To create a generation that is money savvy, it is important that the South African youth are financially educated as early as possible about debt.
Debt among youth is already on a steady incline, and more credit providers are readily offering credit to consumers, which often leads to excess debt if people are not responsible.
An Eighty20 study showed that around 20% of South African youth between the ages of 18-24 are credit active.
Sebastien Alexanderson, founder and debt counsellor at National Debt Advisors (NDA), said: “It’s 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. This will lead to better decision making in the long run.”
Different types of credit or debt
There are two major debt or credit agreements - secured and unsecured.
Secured debt:
This involves having to put down an asset as collateral in case repayment can’t be made, in which case the lender may take your asset. Examples of secured debt include home loans or vehicle financing. This type of debt generally has better terms that allow people to save money while being responsible for the risks.
Unsecured debt:
Unsecured debt refers to retail accounts, personal loans, credit cards and overdraft facilities. While unsecured debt may mean less risk for the consumer as the lender is liable, the attached interest rates are high.
Examples of debt:
Personal loan: The larger the amount loaned, the longer the payment term will be. If the loan was taken with registered creditors and money lenders, then the interest rates usually range between 3% to 30%.
Payday loans: are structured over a short-term period and assist people until they get their next check. The repayment terms depend on how long before your next wage/salary date and the interest rates are high.
Consolidation loan: This refers to taking one loan amount to cover multiple debts. Essentially, having one big debt to pay off smaller debts.
Vehicle financing: A vehicle finance credit agreement normally has a repayment term of between 36 and 72 months. The longer the term, the lower the instalment. However, the longer term will amount to a larger overall amount paid back.
Home loans: Most home loans require at least a 10% deposit to secure the loan. People can choose to have a fixed interest rate on a home loan.
Student loan: This can cover tertiary education costs, including textbooks and accommodation. The monthly interest on the loan must be paid back during the time you are at university, while the full loan amount needs to be paid back once you get a job.
How young people can manage their debt?
- Ensure that you know what is reflected in your credit report. Young people not get a loan if their credit report filled with judgments and bad payment history.
- Have all the facts about the loan, including interest rate, the repayment term, and monthly instalments.
- Make sure that you have credit life insurance in the case of death, disability, and retrenchment.
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