Credit contracts and what they really say

I do not like credit contracts that are taken out with stores as the interest rates are very high and the administration and initiation fees are also expensive. Buying larger items through your bond saves you money – if you must buy on credit this is the best way!


If you must take a credit contract there is so much small print you never know where to start and if you do most of it is gibberish anyway. What the small print really does is: 1: Protects the lender or seller and 2: Protects you the buyer.

Common Basic Conditions include:

• The ownership of the item you buy belongs to the store until you have paid both the capital and interest in full.
• The risk of ownership is yours from date of possession. Once the goods leave the store you will liable if stolen or damaged, you must insure the goods.
• There is an initiation fee that can be paid in cash or added to the loan. This fee will attract interest if added to the loan value.
• The insurance supplied by the seller does not have to be purchased. However, confirmation that alternative insurance has been taken may be a requirement.
• Life insurance sufficient to cover the outstanding loan amount may be required. This may also be taken by alternative insurers if proof is given.
• You may not move the goods to a new address unless you notify the seller in writing, indicating your new address.
• That access to inspect the goods as well as proof of address must be available on request.
• If you want to settle the loan, you must obtain a settlement amount from the seller. An early settlement fee can be charged by some sellers. Some contracts have a 90day clause. This clause basically means you will have to pay a penalty if you settle the outstanding balance without first giving the lender 90 days notice that you are going to settle.
• If you want to cancel and return the goods you may, however, they will charge you a settlement amount on top of the return of the goods. You can obtain this only after returning the goods. You can then decline to pay the settlement and collect the goods and continue with the contract.
• Extra interest will charged on overdue accounts.
• Extra charges can be added to the contract if they have to phone or write letters for outstanding money.
• The seller can repossess the goods if you default on payment and bill you for the remaining settlement amount.
• The seller is allowed to cede his rights to another. This means that the seller is allowed to sell his debt and does not really affect you in terms of payments or ownership of the goods.
• If the seller gives you a chance when you miss a payment this does not mean that he cannot collect the debt at a later stage or that he has to give you any more chances.
• You must give your domicile (address) where the seller can send legal notices.
• It also informs you of the court that can hear any case related to the contract.
• The seller can load payment information at the credit bureaux, whether it is good or bad. This affects your credit score.
• The details of the legal action that will be taken if you do not make your payments is also explained.

There can be variations and additions to these contracts so always read them but these are a general guide.

Mortgage Bond/Home loan:

Do you need help in this area? Most people say no. They meet their minimum monthly repayments and expect to own their home outright after the 240-month loan term.


But if you have a bond and you only pay the minimum instalment you do need help in this area!

What is a mortgage bond?
A mortgage bond is a long-term loan taken out using your property as surety for the debt. What is surety? Surety is basically a guarantee. In other words if you default on any payment on your bond your property may be taken back and sold to recover the outstanding loan amount. If the property is sold and the amount it is sold for is less than the outstanding bond (as well as lawyers fees etc) you will be held liable for the outstanding balance.

Why do I say if you have a bond you need help?
Well, I am sure you have heard that a bond is a loan taken at a low interest rate and is “good” debt.

From 1 perspective this may be true and by knowing and understanding this information you can use it to pay less for cars and other large purchases as explained in a previous blog post.

But as the average homeowner, paying your minimum bond repayment on a monthly basis related to the current interest rate, the interest rate may be lower but the actual amount of interest paid is far higher.
To compound the problem the interest rate could change with any MPC meeting and ensures continuous fluctuations in the monthly repayment amount, making it difficult to budget.

The question left to be answered is: What can I do to pay less interest and actually pay less for my home?
The answer is a simple one: Pay extra on your home loan every month.

Every cent of the extra you pay will be deducted directly from your capital and since interest is only charged on the outstanding capital this will reduce your instalment monthly by a small margin. If you do not decrease your instalment but rather set up a fixed repayment amount, the actual effect is that your home loan is paid off in a much shorter time. Not mention the saving you make on not paying the bank all that interest.

How do I keep my instalment fixed? Phone the bank you have your bond with and ask them to take a fixed amount on debit order every month. Then consciously deposit any extra money you have into the bond at the end of the month. If you have an access bond keep your emergency saving in here to further reduce your interest.


Eg: A R 500000.00 home loan at an interest rate of 12% over 20 years give you a monthly instalment of
R 5505.43 per month.

By paying only the minimum balance due the follow occurs:

Time to pay off loan:     240 months
Actual amount Paid:      R 1 321 303.20
Capital amount Paid:     R    500 000.00
Interest amount Paid:     R    821 303.20

By paying R 100 extra per month the following occurs:
Your instalment becomes R 5605.43 per month.

Time to pay off loan:      224 months
Actual amount Paid:       R 1 253 751.05
Capital amount Paid:      R    500 000.00
Interest amount Paid:      R    753 751.05

So with just an extra R100 per month you save R 67552.15 in interest and repay the loan 16 months earlier.

By paying R500 extra per month the following occurs:
Your instalment becomes R 6005.43 per month.

Time to pay off loan:          180 months
Actual amount Paid:           R1 078 684.39
Capital amount Paid:          R   500 000.00
Interest amount Paid:         R   578 684.39

So with R500 per month you save R 242 618.81 in interest and repay the loan 60 months earlier. That is 5 years sooner!

Shocked?

Now tell me again that a home loan is the cheapest form of debt? I am sure that after this exercise you will agree that the only party making money from this loan is the bank.

If you have an access bond the extra paid into the home loan every month can be withdrawn for an emergency. It is a great saving place as it decreases the amount of interest you pay as well as ensuring a build up of savings for a rainy day or ensuring you own your home after only a few years.

Buying a second home is then easy. You can use it to generate an extra income from property rental or to increase your retirement fund not to mention the satisfaction of not paying a monthly home loan!!!

Credit Cards

Basic explanation – layman’s terms for this type of debt


There are 2 types of revolving credit on your credit card. In effect 2 different credit limits.

The first limit is called a straight facility. This is the amount of credit extended on a monthly basis. This credit is interest free when certain terms and conditions are met. Usually these terms include that the full outstanding balance must be settled within 55 days and cash and fuel transactions incur interest from day of purchase or withdrawal. You should pay the full outstanding balance on this limit every month (have no balance due).

The second limit is called a budget limit. You can purchase goods on this credit line over a certain amount (normally R 300) and repay the credit over 6,12,18,24,or 36 months. Remember interest is charged on this loan from the date of purchase. Each purchase made using this facility is charged as a separate loan and will be listed on your statement as separate loans. Interest will be charged per loan and the repayments of each “loan” will be added together to make up the amount due at the end of the month. You should not have to use this facility, or at worst use it only for major purchases.

Task:

1. Take all your credit cards from your purse.
2. Get the latest statement from each of these cards.
3. Make a list of the outstanding balance on each card from the highest to the lowest.
4. Make a list again from highest to lowest of the minimum monthly payment to be made on each card.
5. Line up your credit cards in order from the least monthly payment to the highest.
6. Any amounts within a R100 range put the higher interest rated card above the lower interest rated card on the list.

E.g: Anne has 7 credit cards:


Card       Balance owing       Interest Rate          Minimum monthly payment
1               R 4500.00              17.5%                     R 275.00
2               R 3200.00              16.8%                     R 192.00
3               R 6800.00              15.5%                     R 355.00
4               R 4500.00              16.9%                     R 268.00
5               R 12500.00            17.8%                     R 721.00
6               R 8200.00              22%                        R 492.00
7               R 5750.00              23%                        R 527.00

Rearrange the list according to balance owing:

Card       Balance owing       Interest Rate          Minimum monthly payment
2                R 3200.00                16.8%                      R 192.00
4                R 4500.00                16.9%                      R 268.00
1                R 4500.00                17.5%                      R 275.00
3                R 6800.00                15.5%                      R 355.00
6                R 8200.00                22%                         R 492.00
7                R 5750.00                23%                         R 527.00
5                R 12500.00              17.8%                      R 721.00

How to pay them off:


Pay the minimum balance owing on each card.
Pay extra (as much as you can afford) into the first card on the list above.
Once the first card is paid of, begin paying the minimum amount plus the extra you were paying on the first card on the second card on the list.

Once the second card is paid off, take the minimum balance paid on both the first and second card with the extra you were paying on the first card and pay off the third card. Continue in this manner until all the cards are paid off.

E.g:

Pay minimum on all the cards then pay R 200 per month extra on card 2. When card 2 is paid off pay minimum on all cards and R 392.00 per month extra on card 4. When card 4 is paid pay minimum on each card and R660.00 extra on card 1 and so on and so forth.

As you can see the suggestion is not to pay the card with the highest interest rate first. Although this will work and is the normal suggested route of repayment recommended by most financial advisors. I have decided to use a different approach for two reasons:

Firstly: The card with the least outstanding balance will be paid off much quicker thus leaving you with extra disposable monthly income much quicker. This alleviates immediate financial stress that, if you are reading this you most likely have.

Secondly: It is more motivational if you can get some debt paid off and eradicated. When you manage to eliminate an entire credit card you are more motivated to get through the next one especially when the next one is paid off in half the time and the third one even quicker.


This will help you maintain the habit of paying off debt and then institute a habit of saving.

How much should you be saving?

Saving is the most important part of your financial life, it becomes addictive if you start and you want to save a larger portion and not spend as much when you see the amount grow in value.

You should be saving 10% of you income from the day you start working towards retirement. If your company offers a pension fund they to will normally put 10% to match yours and over your earning lifetime this should be sufficient to continue with your present lifestyle once retired.

Remember the later you start the less you will have, by a large margin (We will discuss this in another post). You must never be tempted to loan against or stop these savings as they are long term.


Any retirement fund is a good starting place, get yourself a financial advisor from one of the leading insurance companies, here in SA these include Libery Life, Old Mutual, Sanlam, Momentum etc.

The second saving pocket you should be creating is a short term or emergency fund saving, this should equal 8 months debt repayments or about 4 to 5 months salary. This should is for bad economic climates such as we are experiencing at the moment. Should you lose your job or interest rates spike higher you should have no problem ensuring that these effects go relatively unnoticeable if you are prepared with this fund. Once you have this fund it will slowly increase if unused due to interest. Remember if you take out any new credit loans, your savings need to increase by 8 times the loan repayment amount.

The third saving should be for the things you want. We tend to want things immediately so we do not save for them, but if we budget on wanting things in advance we can avoid going into credit to achieve these. We need to plan our annual holiday, how much we are planning to spend on it. Plan the amount we want to spend on luxury items etc. Then we need to keep an amount out and save it every month until we are in a position to take the holiday we want without maxing out our credit cards. By saving and earning interest on our savings we will have a few Rand extra for our holiday rather than pay it off over the next year and pay a few Rand more than expected because there was an interest rate increase.

To calculate how much you need to save for these items build a budget.

Sample budget for a new luxury purchase (eg: new lounge suite)

1. How much will it cost?

Purchase price: _____________
Delivery:       + _____________
Total Cost:
                       ============

2. How much will I receive?

Sale of old item: ______________

Nett amount required: 1 – 2 = _______________

3. Date I wish to buy the item: _________________
4. Date today:                         _________________

Number of months to save: 3 – 4 = _________________

5. Divide the Nett amount required by number of months to save and you will receive an amount per month to save.


Remember if you can’t afford to save that amount per month you won’t afford the repayments on the item anyway so you should not buy it. You should either postpone the purchase date or buy a lower priced item.

Now start saving, the greatest part about this is that once you have saved the amount per month for the number of months you decided on, you will purchase the new item and have spare cash!!!

You could spend that on spoiling yourself as a reward for saving instead on lending, for example if you bought a new lounge suite, you may have enough to buy a few throw cushions to match and your lounge has a make over!

Sample Holiday budget:
Total Cost:

Accomodation:                 ________________
Traveling expenses:       + ________________
Food allowance:             + ________________
Special trips/excursions:+ ________________
Treats:                          + ________________
Total cost:
                                         ==============

1. Date you plan to go on holiday: _____________

2. Date today:                               _____________

3. Number of months to save: 2 –1 = ___________

Divide total cost by nr of months to save and you get your savings per month:

Once again remember if you can’t afford to save this amount you can’t really afford the holiday, rather save the extra few months and go later, or scale down the holiday by camping or staying in a self catering resort, you will then have a little spare due to interest earned as opposed to paying interest on your return, once again treat yourself, buy a new swimming costume for the beach or stay 1 night in a luxury hotel. Remember, you will have more money than what you saved as opposed to paying more for the holiday than it cost, this means treats are the order of the day.