Debt a double-edged sword for consumers

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“Debt can be a good thing and it can be a bad thing, it all depends in terms of how you use it. When you buy a house,[or] purchase a car to be able to get around, [debt] allows you to create wealth for yourself,” Louisa Hetisani, manager of credit information at the National Credit Regulator, told CNBC Africa.

“Debt starts becoming bad when you use it for consumption. Everyday expenses should be financed by your income. You shouldn’t be using your credit card or getting a loan to buy a smart shirt or to look fancy for an event. Then, it starts getting bad.”

According to African Bank, People within the lower Living Standards Measure (LSM) ranking tend to take out debt to pay for costs such as school fees and transport, whereas people in the higher LSM category use debt as a deposit to buy a house and vehicles.

The Living Standards Measure is a marketing research tool developed in Southern Africa that divided the population into 10 LSM groups. 10 is the highest ranking and 1 is the lowest ranking. 

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“What we’ve seen over time is that there’s been a migration in the use of personal loans. Typically, they were associated with people at the lower end, and because the term and the size of the loan has grown over time, you tend to find that people in the higher income bracket tend to take those loans,” Hetisani explained.

“My advice is to consumers is to take on debt that you need. You need to differentiate between a need and a want. Ideally, you should be taking debt only if you really have to, because there will be interest, there will be charges, initiation fees. At times you need to even pay insurance to secure that debt.”

Hetisani added that while a credit provider might explain that you qualify for more debt than you currently need, refraining from taking on more is a necessary step  in controlling one’s debt levels.

“First differentiate between a need and a want. Initially when you leave home,  you’re thinking ‘I need 5000 rand,’ you get [to the bank] and they tell you ‘you qualify for 15,000 rand.’ Why do you have to take 15,000 rand when you only need 5,000 rand?”

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Consumers can however fall into a spending trap that results in allocating more of one’s income towards servicing accumulated debt alone.

“Typically, when you’re going to go into default, you can see it a few months ahead. As consumers, we tend to hide, avoid the phone calls, not read the letters. You’re hoping that the problem will go away. That’s when you need to take action,” said Hetisani.

“Approach your credit provider and say you’re in a bit of a tough space. Most of them are willing to work with a consumer. Don’t’ ignore the problem. It’s not going to go away.”