Friday, September 14, 2012

Should I be taking out a loan?

A loan, if done under the right circumstances and for the right reasons, can be a good thing.

Here's why:

If you take out a loan and you are diligent when it comes to making your monthly repayments, you will establish what's known as a good credit history. Your credit history is established based on the number of credit accounts you have. An account could include a clothing account at a retail outlet or a credit card from a bank.

So the answer to the question should I be taking out a loan' is simple:

You should only be lending money in situations where you really need it and not to buy things that you want.

This is where the line definitely becomes blurred for a lot of people. Many people get stuck in a vicious circle of debt because they start using their credit cards for luxury items and ultimately overspend. To make matters worse, the more you spend on your credit card, the higher your credit limit goes, giving you leeway to spend even more.

A credit card can be a valuable asset if you use it in the right situation. Let's say you earn R5000 a month. R1500 of that goes toward groceries and toiletries. R2000 goes toward rent, and you've got R1500 left to save or do whatever you wish. During one particular month your car breaks down, you don't have insurance and the repairs to the vehicle are going to cost R3000.

You only have R1500 to spare- what now? You've got your credit card right? So all you need to do is use your R1500 spending money and the R1500 you would have spent on groceries to pay for the repairs to your car. Then you use the credit card to pay for your groceries. This is an effective compromise because you will only be putting R1500 through on your credit card instead of the full R3000, so you'll end up paying back less.

Why would I ever need a good credit history?

Well besides having a credit card to bail you out of situations like the one described above, having a good credit history comes in handy when you make one of the biggest purchasing decisions of your life -buying a house. Houses are expensive, which means that you'll have to lend from the bank. In the last couple of years lending criteria have become stringent, making it much harder for the average person to take out a loan.

Banks take a number of factors into consideration when assessing loan applications, including monthly income and credit history. If the bank can see that you've made an effort to pay your account on time each month there's a much greater chance that they'll approve your loan.

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