Whether your geyser breaks and floods your house or your car breaks down while you are on holiday, unforeseen expenses can result in sleepless nights.
“Deciding which form of credit to use can be tricky,” says Alfred Ramosedi, African Bank Group Executive: Sales and Marketing.
A credit card is a line of credit from which you can borrow money at any time, up to your credit limit. This is predetermined by your salary income and credit record. Credit cards act as substitutes for cash, but also allow you access to credit, typically interest free for 55 days. Credit card debt is known as revolving debt. “This means that if you do not pay the whole amount owed at the end of the month, you will pay interest on the balance. You will however still be able to make new purchases up to your credit limit amount,” explains Ramosedi.
A personal loan, on the other hand, is a lump sum in your pocket – a fixed amount which you repay in equal instalments for a predetermined period of time. “Unlike a credit card, you cannot access the money you have paid back to the bank or credit provider. The fixed term over which you commit to settle the debt allows you to know exactly when this debt will be fully paid off,” he says.
So the important question is, when is it best to use a credit card or opt for a personal loan? African Bank provides some general rules:
- Reserve the use of your credit card for times when you need immediate access to instant cash. Credit cards are best for making smaller purchases or consolidating smaller debts that you can comfortably repay within a year. Ramosedi says generally it is always better to pay cash, but sometimes credit can be a life saver to help you ride out financial emergencies. “If you plan correctly and take your finances seriously, credit can also be a way to meet specific financial and life goals you have set for yourself.”
- Personal loans are better for larger purchases that may take you more than a year to repay. You can pay off your loan in full at any time to save money on interest. They are more suitable for people with moderate debt loads and a good credit score who are looking to simplify or accelerate their debt repayment. They are not secured by any property or surety and should be made only after doing some research and financial planning. Interest charged on unsecured credit is typically higher than the interest charged on secured loans because of a greater risk to the credit provider.
While credit cards are convenient, in some cases a personal loan may be a more sensible and affordable way to pay for a large purchase over time, particularly if you can secure a fixed interest pay back. Credit should always be used with caution as your payment behaviour determines whether or not you will be eligible for future credit and it affects the interest rate at which you will borrow in the future.
“Whether you decide to use your credit card or apply for a personal loan, be sure to do your research and use a reputable credit provider that is registered and therefore regulated by the National Credit Regulator (NCR). You also need to compare interest rates. Often you will find that interest rates are linked to inflation. This can be tricky as you don’t always know how much you will be paying on a monthly basis which makes it difficult to budget. Our advice is shop around. African Bank for example is offering a 15% personal loan which gives you a fixed interest rate and fixed monthly repayments for the term of the loan. So you don’t have to worry about fluctuations when the economy changes,” concludes Ramosedi.