MONEY CLINIC | What does credit actually cost?

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You need to ensure that you understand what the total amount is that you will re-pay and if that amount is reasonable.
You need to ensure that you understand what the total amount is that you will re-pay and if that amount is reasonable.
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Credit is an important part of an adult's life. Whether you need a home loan, financing for your side hustle or paying for your child's education, it has become a key step and, if used correctly, can enhance your financial well-being.

According to Ester Ochse, Product Head, FNB Money Management, you as the consumer must ensure that you understand what the total amount is that you will repay, and if that amount is reasonable for the need you want to use the credit for. 

Ochse breaks down how costs are calculated by financial institutions:

We have all seen the adverts to take a loan/buy something with credit because it only costs R250, R500, R1 000 per month. 

What does that mean and how much are you paying in total? 

To figure out how to calculate what you'd pay for the money you're borrowing, let’s look at an example.

Say you would like to borrow an amount of R100 000 for a period of five years. The quote that you receive from the financial institution says that you get an interest rate of 15% and the monthly instalment is R2 508.46.

This is how the credit provider will calculate your instalment amount:

The capital (or principal) amount is the actual amount you borrow. In this instance, the amount of R100 000.

The interest rate is how much the financial institution will charge you for borrowing the money from them. The amount charged will depend on your credit score. You can easily check your credit status with any financial bureau. In this example, the interest rate is 15%.

Monthly service fees are the fees that the financial institution will charge monthly to administer the loan. These typically range from R50 to R115 per month. In this instance, let’s assume that it is R69 per month.

The initiation fee: The financial institution will charge the amount for the loan documents and admin for starting the agreement. These are also around R1 000 per loan. Let’s assume that this one is R1 207.50. 

Consumer Protection Plan (CPP): This is insurance that will pay out and cover the outstanding amount on the loan in the event of death, disability or temporary loss of income. Let’s assume that, in this instance, it is R324 per month.

All these amounts add up to the total cost you will pay for the loan over the term. Let’s look at the total amount that you will pay for this loan:

R100 000 + R50 507.60 = R150 507.60.

Capital amount + Interest/Fees = Total amount payable over the loan term.

Remember to include the repayments of any loan into your monthly budget. 

*Disclaimer: The numbers provided are for illustrative purposes only.

Questions may be edited for brevity and clarity.

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