I am amazed at the number of young graduates and professionals who email me after-the-event to seek help about Personal Loans of over R200 000. In some instances, they took these loans to build or renovate their parents’ homes. I continue to say what a pity it is that we are not taught about money in our schools and universities because if we were, very few people would take a personal loan – even a small one. Ignorance is costly. Most people who attend my talks would remember my saying that “A Personal Loan is going to make you Personally Poor.” The higher the amount of the personal loan, the higher the chances that you would end up personally poor!
Accountants speak of the matching principle i.e. use a short-term loan to finance short-term needs and a long-term loan to finance long-term needs. There is a good reason for the matching principle. The home you want to build or renovate would in essence be collateral for the loan and you should therefore NOT be using a personal loan because a personal loan, is NOT a secured loan hence the very high interest rate that is charged on this type of loan
Refer to my book From Debt to Riches to understand the interest rates on personal loans and other types of loans and you would appreciate why you want to stay away from short-term, unsecured debt. To add to the cost of the personal loan, is its twin – Credit Life. Some of my customers have been able to at least get out of the credit life assurance and used the premiums to pay towards the personal loans. What a pity that some credit assurance providers sometimes refuse to cancel these policies.
I am glad though that most of my customers have been able to cancel expensive credit life and saved themselves a lot of money in the process. There are very few instances where credit life makes sense but sadly it is sold to all and sundry. The onus is upon you to understand why you should say NO to credit life and what your options are.
So what do you do if you want to improve your parents’ home or to build one from scratch? Can you do this cheaper?
Before you take a personal loan, ask yourself the following questions:
- Can I get a loan that is cheaper than a personal loan?
- Can I use a re-advance loan, if the house is bonded?
- Can I use a refinance loan if there is no bond on the house?
- How can I pay off the loan sooner so I can carry on with my own life without the burden of long-term monthly loan repayments?
- How can I ensure the loan is settled when my parents pass on?
- What if I want to build in the rural areas?
- Should I take credit life assurance when I take a loan or can I say NO to credit life and save myself money?
Answers and examples to all of these questions are contained in my book From Debt to Riches. You would be best advised to read the book before you get into expensive debt because once you are in, it is difficult to get out.
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