Five Worst Types of Debt to Avoid if You Can

There are times when you feel that borrowing money and taking out a loan is the only valid option, but it doesn’t have to be this way. Here are some of the worst types of debt to avoid from the various types of debt funding your daily needs.

1. Credit card debt

The most common type of unsecured debt, credit card debt is convenient whenever funding an expensive purchase, despite the associated higher interest rate. Credit card debt can spiral out-of-control when it is not paid off regularly within the stipulated periods.

Failing on making repayments or over-extending the credit limit often leads to piling debt. The good news is that you don’t have to cut your credit cards in half (unless you want to). Focus on controlling the situation and breaking the debt cycle, step by step.

• Limit your credit card use to emergencies instead of luxury or indulgent purchases to break the debt cycle.
• Commit to repaying the minimum monthly amount on existing credit cards to reduce the debt pile.
• Lower your card limit to avoid major debt-funded spending sprees.
• Consider the interest rate, your income and purchasing behaviour before signing up for a new credit card.
• Better yet, limit the number of total credit cards in your wallet so you can avoid temptation and make your debt easier to manage.
• Consolidate multiple credit card debts into one affordable debt. Speak to an ezDebt counsellor about your options.

2. Personal loans

South Africans turn to personal loans to borrow money for purchases such as expensive retail items (clothing, furniture, electronics) or to finance important life events (travel holidays, building and renovations, celebrations, medical treatments, education etc.).

Personal loans are another type of unsecured debt to avoid because of their high interest rate (over 25%) and usually larger size (compared to credit card debt subjected to a lower credit limit). Notably, any sizeable loans that you cannot manage and repay monthly with your current income can lead to growing debt and, subsequently, poor credit ratings.

Think twice before applying for a personal loan:

• Save up regularly until you can afford the purchase (for example, expensive furniture) instead of applying for a personal loan or credit.
• Say no to illegal loan shark deals at extremely high interest rates (exceeding market rates) or short-term repayment plans.
• If you’ve already taken the personal loan but cannot afford it anymore, try to renegotiate the loan terms, duration or interest rate. You may need to consult an ezDebt counsellor to assist with securing a more affordable option.

3. Vehicle finance

Generally, borrowing to purchase depreciating assets is consider bad debt and one of the worst types of debt to take. Contrary to popular belief, car loans are usually in this category. Because vehicles are expensive commodities, you’re likely to go for a financing loan rather than paying cash. It is understandable as long as you know the terms that may affect your ability to repay the loan (in which case the creditor can repossess the vehicle).

• Be careful of those hidden costs that often get overlooked with the monthly repayments, e.g. registration fees, roadside assistance, service.
• Factor in car insurance, petrol costs and maintenance when calculating the total costs of vehicle ownership, not just the monthly loan instalment.
• Saving up and putting down a large down payment reduces the total loan amount, decreasing the high-interest repayments over time.

4. Medical or health-related debt

Medical debts are burdensome but easily accessible for most unpredictable medical treatments, injuries, and emergencies. However, you can avoid the high costs of taking a medical loan through better preparation. Prevention is always better than cure.

• Seek comprehensive but affordable medical insurance to cover your health needs and treatment costs.
• Taking gap cover insurance to cover the shortfall is an option when the medical insurance does not cover all hospital costs.
• Save money regularly into a rainy day fund for such emergencies – illness or injury – instead of taking out medical debt.

5. Student aid or education debt

While higher education is an important goal for your personal career or your children’s, getting into massive debt because of it isn’t, especially when the chance of securing high-earning jobs isn’t guaranteed.

Considering the increasing costs of a well-rounded university degree, young students may not even find a first job that pays well enough to cover these repayments, leaving them drowning in debt. The solution is to seek other ways to fund tertiary studies without paying back a considerable loan when you can’t afford it.

• Think of a part-time, casual job or side hustle to cover mounting education costs or reduce the current student loan amount.
• Save money towards an education fund and apply for the degree you want when you have enough funds to begin classes.
• Consider alternative educational resources and similar accredited courses at a fraction of the cost before jumping into debt with both feet.

Need help with paying off debt? Our professional ezDebt advisers can assist with debt repayments through quick and affordable debt counselling. All our debt counsellors are registered with the National Credit Regulator (NCR). Get in touch at www.ezdebt.co.za.