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MONEY CLINIC | What does credit really cost?

You need to make sure you understand what the total amount you will be repaying is and whether that amount is reasonable.

Credit is an important part of an adult’s life. Whether you need a home loan, financing for your odd jobs or to pay for your child’s education, it has become a key step and, if used correctly, can improve your financial well-being. .

According to Ester Ochse, Product Manager, ETF Financial Management, as a consumer, you need to make sure you understand what the total amount you will be repaying is and whether that amount is reasonable for the purpose for which you want to use the credit.

Ochse breaks down how costs are calculated by financial institutions:

We have all seen the advertisements for taking out a loan/buying something on credit as it only costs R250, R500, R1000 per month.

What does this mean and how much do you pay in total?

To understand how to calculate what you would pay for the money you borrow, let’s look at an example.

Suppose you want to borrow an amount of R100,000 for a period of five years. The quote you receive from the financial institution indicates that you get an interest rate of 15% and the monthly payment is R2,508.46.

Here’s how the credit grantor will calculate your payment amount:

The amount of capital (or principal) is the actual amount you borrow. In this case, the amount of R100,000.

The interest rate is the amount the financial institution will charge you to borrow money. The amount charged will depend on your credit score. You can easily check your credit status with any financial office. In this example, the interest rate is 15%.

Monthly service charge are the fees that the financial institution will charge monthly to administer the loan. These usually range from R50 to R115 per month. In this case, let’s assume it’s R69 per month.

Initiation fees: The financial institution will charge the amount of the loan documents and the administrator for starting the agreement. These are also around R1,000 per loan. Suppose this is R1 207.50.

Consumer Protection Regime (CPR): This is insurance that will repay and cover the outstanding amount of the loan in the event of death, disability or temporary loss of income. Suppose in this case it is R324 per month.

All of these amounts add up to the total cost you will pay for the loan over the term. Let’s look at the total amount you will pay for this loan:

R100,000 + R50,507.60 = R150,507.60.

Principal amount + Interest/Fees = Total amount to be paid over the term of the loan.

Don’t forget to include any loan repayments in your monthly budget.

*Warning: The figures provided are indicative only.

Questions may be edited for brevity and clarity.