An introduction into the world of loans

An introduction into the world of loans - Afrika Kesho

A financial ice breaker

Do you remember the first time you borrowed money? It might have been that time when you were caught between a financial rock and a financial hard place – a  time when your temporary financial situation was not that great, and you needed some sort of financial aid to help you get by until you got back on your feet again. Or it might have been that time when, although you were not all that stranded for cash to help you get by, you just borrowed the extra money to buy yourself something nice that you couldn’t finance entirely on your own.

If you have such a memory of borrowing money – whether the money you borrowed was for something important or not – then you, my friend, have officially been acquainted with the world of loans. Welcome to the club!

Now, onto the business of the day

At one point or another, we all end up taking a loan. This can be a loan from a friend or family member, or a loan from a financial institution. That being the case, it is important to assess our own financial situation before taking out a loan and for us to ask the right questions about the asset we are buying, amongst other things. These two aspects, asking the right questions and assessing your personal finances, will be the focus of this article.

As most people commonly take out either a home loan or a car loan, I’ll be using home loans as an example. I urge you to ask yourself similar questions when considering taking on other kinds of loans.

Home loans: The questions and considerations

Home loans, by their nature, are long term. These loans are a serious commitment that one will be tied to for a period of 10-15 years of their life, maybe even more, so you must assess your income stability before deciding to take this loan on.

The questions

Before you deciding to dive straight into taking out a home loan, ask yourself:

Am I prepared for such a long-term financial commitment?

This question is important to ask because some people will take out a home loan when they are still quiet young and when they still want to spend their money on having fun and enjoying their youth. For such people, I would reason that it is better to commit to buying a home a bit later in life when they are finally ready to commit a portion of your income to paying for their home loan. If you are not prepared to do that, then don’t take out a home loan yet.

Am I employed long-term or short-term? and Do I have a permanent position at my company?

An answer to these questions will give you an idea about your financial stability. For example, if you have a permanent position when you are employed at a company, to some degree you will be able to weather the storm of retrenchments and not lose your job easily. If that is the case, committing to a long-term loan will be a bit easier, since you will have the means to pay for it in the foreseeable future due to your income stability.

Many years from now, will I want to live here?

Home location should also be an aspect that is considered before you take out a loan. This is because, as stated above, a home loan is a long-term commitment, and you don’t want to be staying at a location you don’t like because of the loan that you have.

Will I be renting a portion of my house to tenants?

Some houses are big, and probably have extra space you can rent out to tenants. Renting out rooms of the house whose loan you must repay will give you some extra income. This income from tenants can then then be used to pay for a portion of the loan. In some instances, income from tenants can be enough to cover the whole monthly payments you have to make to the bank. Should this be the case, then you are well on your way to becoming a property investor.

Personal financial assessment

The very first step to take when getting a home loan is to check your credit score. This is so that you can get a clear picture of the loans that you qualify for. After this, you can then proceed to comparing quotes from different financial institutions in order to get the loan deal with the best interest rates and repayment plans that best suit your financial needs and circumstances. After all, you don’t want to find yourself in a situation where you are strangling yourself with repayment plans that you can’t afford.

Whether or not to buy a home

When it comes to property, many people get stuck in the dilemma of choosing between buying a house or renting a house; both options have their respective pros and cons, depending on your personal finance circumstances.

Buying a house may seem too expensive and burdensome for most, but it bears quite a few advantages. The great thing about buying a house is that property generally appreciates over time, and so one can earn a profit should they decide to sell the property in future. This gives the homeowner the benefit of having an investment to fall back on and growing their wealth.

Be careful though. Although you stand to gain a return should you choose to sell your home in future, make no mistake of thinking that this is a way to make a quick buck. As I hope you would have learnt as a homeowner, buying and selling immovable property poses legal implications and has expenses such as “Estate Duty Tax”, all of which may prolong the process of finalising a sale.

Another benefit of buying a house is that you can turn it into a business to bring in some extra income by renting it out to residents or small business owners, if the area where the property is situated allows you to do that. Making regular payments towards your home loan also increases your credit score. So, you to stand a better chance of qualifying for any other loan that you may wish to take out.

Other insights

The process of acquiring a car loan is very similar to that of a home loan.  The main difference between the two loans is mostly in that you have to pay off a car loan within the space of 5 years depending on the payment plan that you choose to take. Car loans are also much simpler than home loans.

When it comes to car loans, I would prefer checking if I qualify for a personal loan of up to R80 000, for example, then buying a reasonable second-hand car within that price range. I would do this as opposed to taking out a car loan to purchase a new car and expose myself to the risk of repossession of the car should I lose my income source.

In conclusion…

I hope the above questions about taking out a home loan to buy a house, personal financial assessment to see whether to not you should take out a loan given your financial circumstances, and points on whether or not to buy a home, shed some light on things to consider when deciding to take out a home loan, and other types of loans.

This article was written by Karabo Rantho.

You can contact Karabo Rantho by clicking on the social media buttons below, or by emailing her on: karabor@afrikakesho.co.za.

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