Times are tough. You don’t have to look further than your own finances to know that. According to TransUnion’s most recent Industry Insights Report, consumer debt has increased sharply in the past 12 months. The worrying trend is that ordinary South Africans are using credit cards and personal loans just to cover everyday expenses such as their groceries and fuel.
When you do this, you are using future earnings to pay for today’s expenses. There are two main types of credit available to help you through hard times – secured, and unsecured. Let’s have a look at the key differences, and what they mean to you.
In simple terms, secured credit means the bank, or the lender, holds one of your assets in exchange for giving you the loan – like your car, or your home. So your home is the ‘security’ for your home loan: if you don’t pay your bond, the bank will sell your house to cover the money they lent you. The same applies to your car.
Unsecured credit means the bank, or the lender, doesn’t have any asset to hold onto in exchange for giving you a loan. The risk for the lender in this instance is much higher than secured credit and therefore the lender needs to attach a higher interest rate to these loans. However, unsecured credit is useful when you need to cover an emergency expense or smaller expenses such as furniture, travel or electronic goods.
Examples of unsecured credit are credit cards, microloans, personal loans and retail store accounts. Basically, they’re accepting your promise to pay them back in the future. That’s why unsecured loans are usually based on your credit history and payment behaviour amongst other factors applied by the lender.
The bottom line is that it’s important to understand what you require credit for, and whether you can afford the monthly repayments before you make any commitments as late or non-payment of these credit agreements will affect your credit rating. Your financial health depends on it.