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Dangerous Debt Traps To Avoid

Due to the tough economic climate, it may not be that easy to get credit as it was before but that doesn’t mean it’s going to stop some from finding alternative means of financing the things they want.

Why? Because credit is so easier to get than having to save up for what you want, or so many people think. South African’s have become used to the idea of owing money. Putting off the pain of paying for things may seem like a good idea now but, sooner or later, your debt will catch up with you.

More and more South Africans find themselves imprisoned by debt – don’t become another victim. Here’s how you can avoid the most common debt traps:

1. Instant payday loans

A payday loan is a bad way of borrowing money, mainly because it comes attached with extremely high-interest rates. Although the small loans are supposed to help you until you receive your next paycheck, in many cases, individuals cannot pay back the loan on time, which makes them liable for hefty fees. Usually, individuals need to take out another loan to pay for the original one; this can become a vicious debt cycle.

How to avoid this debt trap:

Depending on what the loan is for, try and reevaluate the situation, is this a pressing matter that needs to be sorted immediately? Evaluate the other methods of finance available to you. Can you reduce your costs and save up to pay for it in cash or instalments instead of a quick loan. If you’re using a pay day loan to finance older debt rather look at the debt review process instead of compounding your misery.

2. Credit card rewards

The promise of free trips, cash back, vouchers, free hotel stays among other great perks is enough to motivate almost anyone to get a credit card. Many individuals sign up for credit cards with good intentions but, instead of enjoying the rewards, they end up falling into debt, mainly because it is so easy to make extra purchases.

How to avoid this debt trap:

Don’t take out a credit card if you do not have proper money management skills to use the card responsibly and pay off the balance on the card every month.

3. Home equity loans

Home equity loans, also known as “fool’s gold”, are extremely dangerous and leave many people neck-deep in debt. Using the equity in your home as collateral for purchases may seem like an easy way to get your hands on some cash; however, if you miss payments, you can end up losing your home. The loans are very similar to credit cards, except a lot bigger.

How to avoid this debt trap: 

Don’t make purchases beyond your means, even if you can get your hands on cash easily.

4. New car loans

Cars depreciate almost immediately after leaving the showroom floor and continue to depreciate thereafter. When you finance a car, not only do the monthly payments take a huge chunk out of your salary, but you also have to pay a large interest rate every month, leaving you with less disposable income.

How to avoid this debt trap:

Calculate all the exact costs and interest that come with buying a new car.  Only take out a loan for a new car if it is suitable for your financial circumstances. Remember that taking out a car loan is a long term commitment that you need to consider carefully.

Manage your debt effectively

If you’re feeling overwhelmed by your current financial situation, feel free to contact us. To Speak to one our consultants about debt review contact us here.

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