Financial education is paramount for home economy. Not managing your finances wisely might lead you into insurmountable debt. In a time when the economy of the country is striving and prices are soaring, being financially educated becomes even more important.
According to the consultancy agency Eighty20, there is a 20% of young people from the ages 18 to 24 that are actively pursuing credit. And, when not doing this carefully and responsibly, many of these young men and women are piling up debt after debt.
This is the reason financial education is so important, especially for those people who are just starting to ask for loans on their own. Moreover, as the CEO of the National Debt Advisory, Sebastien Alexanderson, puts it “when financial distress is severe, worrying about it can lead to physical symptoms like lack of concentration, headaches, tension and pain”. So, if you are not careful with your finances, you might experience depression or panic attacks. And when you are in such a mental state, managing your finances becomes even harder and harder, since you are so overwhelmed that you cannot think clearly.
The truth is that many people do not know how credit works. And this is not only the case in South Africa, as a piece of news from Time states, young people in America have “no clue how credit cards work”. Moreover, technology savvy as they are, young people find it easy to ask for online loans. The trend indicates that many South Africans are over-indebted and that they will become even more so. A factor fueling this situation is also the rise in the cost of living and unemployment. It is of paramount importance that young people are educated in terms of their finances.
Types of Loans
There are different types of loans based on the purpose and situation of the person asking for the loan. For instance, there is secured and unsecured debt. Secured loans are those that require you to provide an asset for collateral. That is, if you are not able to pay off the loan, the financial provider will keep your asset. An example of these types of credit are home loans or vehicle loans. Since there is collateral involved, these loans tend to have better conditions, meaning lower interest rates and terms.
The downside of secured loans is that there might be stricter requirements for you to qualify. Unsecured loans, on the other hand, are easier to get since you will not need to provide for any kind of security. An example of these loans are personal loans. With this type of credit you will only need your South African ID, a good credit record and proof of salary. Although they are easier to request, they do entail higher interest rates. Payday loans are another type of unsecured loan, and they consist of money being borrowed for a short-term until you get paid your salary and are able to pay it back.
Young people also turn to student loans to pay for higher education. Interest rates are to be paid while you are studying, and the full amount you ask for must be paid when you graduate and get a job.
When asking for a loan, you should make sure you know what the interest rate is going to be for the whole loan term. With that in mind, it would be wise for you to make a budget and determine if you need to cut down on some expenses in order to pay for your loan installments in a timely manner. Also, you should not opt out for life insurance that will be of help for you and your family in the event of death, illness, or unemployment.
There are many types of loans and also different kinds of financial institutions. Young people should learn to differentiate between lenders that are registered with the NCR and those who do not legally operate. Understanding how loans work, and the risks involved if you are unable to comply with your payment obligation, is paramount. Not only for their financial wellbeing, but also for their mental health.