By David Scholtz – Chief Financial Officer at Eduloan
Few of us can afford tertiary studies without a loan. And, let’s face it, to invest in your future by securing a study loan can be an excellent decision as long as you understand exactly what the loan entails and where it will take you.
Before you even consider a loan, think long and hard about your future career path and how your studies will get you there. It’s no use choosing a career, studying for three or four years and then you can’t find work.
Proper career planning, finding your niche in a job market where critical skills are key in finding employment and good management of your finances all play a crucial role in your or your child’s future.
It is a sad reality that South Africans are generally ignorant about personal finance, and many live by the habit of spending now and paying later. Currently the ratio of debt to disposable income of households is around 76%, it tells you what percentage of consumers’ monthly gross income goes toward paying off debts. About 47% of credit active consumers are two months in arrears or more. About 14% of these consumers have judgements or administration orders against them. A fifth of credit-active consumers are three months or more in arrears. This paints a picture of a nation overextending itself.
There are several ways of getting and staying out of debt.
The first is education about managing your personal finances and the cost of debt.
People who know the meaning of debt, a loan and saving money- and who understand the impact of these – are the people who can plan their lives and ensure a better future for themselves and their dependents.
Debt consolidation is another popular way of alleviating the burden of over-indebtedness.
While this may be a good idea for some, it can result in consumers being locked in to paying off their debts for longer periods and effectively at higher interest rates and fees.
The main appeal of debt consolidation is convenience.
How does it work? Instead of a consumer paying off a number of different loans every month, which might have different interest rates, the consumer can just apply for one big loan, pay off all the other debts they have, and then be left with making a single payment towards that loan every month. The repayments are usually lower instalments, giving them more disposal income, which at first glance seems very attractive.
What most people are not aware of is that debt consolidation locks you in. You still end up owing the same amount of money, but pay your debts off over a longer period and not always at the lowest available interest rates. This means you might end up paying more in the long run. All that is happening is that the repayment of the debt is delayed from the immediate to long-term.
The best option remains to pay off all debt as soon as possible, and then start saving the amounts that you formerly paid over to creditors.
The impact of over-indebtedness on the financing of study loans is considerable. All credit providers look at certain criteria. The credit providing environment is regulated and interest rates are determined based on creditworthiness which includes both affordability and behavioural history. First they will assess the affordability of the commitment to the consumer; they will look at the regular expenses, the disposable income, repayment track record and credit history. The industry is regulated and there are strict rules in place. If you are not creditworthy, it will prove difficult to get a loan.
Eduloan’s model is slightly different to that of micro lenders or banks. When looking at credit our lending is to focus more on salary deduction, whereby we collect the amounts owed via the employer and not the individual’s bank account. The funds are also disbursed directly to the educational institution.
Although Eduloan’s method of granting loans falls under unsecured lending, we have the ability to collect before the person gets his take home salary, thereby protecting our clients from defaulting as he doesn’t have to still pay his loan back from the take home portion.
We also educate clients about their loans. It is all about understanding the value of the loan, how the loan is structured and, if denied, explaining why the loan was denied. We explain exactly how Eduloan loans work in terms of the terms and installments. We are very transparent and there are no hidden costs. The interest rate is fixed, and the installments remain the same for the period that clients sign for.
Here is our advice to parents who want to be able to finance their children’s education:
Mindsets about financial literacy need to be changed, and not only of those who want to secure their future. Corporate South Africa and other employers have a responsibility too. The latter should consider offering financial literacy courses for their personnel, who can then teach the basics to their children at home.
When you look at debt, you need to understand that not all debt is bad, specifically debt that will contribute to your financial well being. Educational debt falls into this category as it gives you the opportunity to invest in your own or your children’s education and will go a long way in setting up the foundation for a debt free future as education is key in improving your income earning potential.
For more information on Eduloan, visit www.eduloan.co.za
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