As retail sector sales pick up and we regain some of our appetite for credit, we need to be particularly cautious about financial instruments that look attractive but which we may not fully understand.
If you want to buy, say, a car, you may look into credit- or asset-based finance packages to assist you; or perhaps you’re keen on putting your savings into a derivative traded globally. The message is simple: these are opaque packages with some hidden costs and implications, so be fully aware of what you’re signing up for before you jump in. And don’t play fast and loose with household savings.
Imara Asset Management MD Lara Warburton says that this “funky financing” is potentially dangerous for families and households as they can’t afford to sacrifice hard-earned money.
“South Africa’s household-debt-to-income ratio still hovers around 80%. This means many families can’t afford to pay cash and need credit to buy expensive items. Financial structures can sweeten the deal by keeping monthly payments affordable. But things can go sour when the transaction’s full implications become apparent or the full term of the contract puts a dent in future plans,” she says. “Consumers are not just buying a big-ticket item; they are buying a financial product as well.”
Warburton’s advice?
- Don’t focus solely on the “affordable” monthly payment. That’s what gets you interested in the deal. Don’t take it at face value.
- Establish the basic cost of the purchase item.
- Establish the full cost when all credit charges and fees are layered on top and then compare total and basic costs.
- Be clear about the term — how many months and years will you be paying for an item?
- Check your credit cost liability, for example, if you pay off a car in three years, not five, do you still have to pay the credit costs of years four and five? If so, walk away.
“Credit may sometimes work in your favour. But make sure you understand the debt you take on. If you don’t understand it, how do you manage the risks? International banks learnt that lesson. Consumers should, too,” says Warburton.
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