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Making the decision to borrow

Before borrowing money, you should answer some very important questions first. Do you need to spend the money? Do you have other options to finance the purchase? Or, most importantly, can you afford to pay back the money you intend to borrow?

Making the decision to take credit or borrow must not be done quickly. Before you borrow, ask yourself the following questions:

  • For what am I borrowing?
  • Is borrowing really the best way to pay for it?
  • Can I really afford it, in terms of monthly repayments?
  • Is now the right time to borrow?
  • How stable is my job?

The risks that come with taking any type of credit, such as a loan, should make you think carefully about when and how much to borrow. While credit can open new doors, you need to know when borrowing is a wise decision.

The exact cost of credit will depend on the type of credit or loan you take, from whom you borrow and how long you take to pay it back. The truth is that if you pay with cash, you can often negotiate a cash discount. You’ll pay less because you won’t pay interest, fees or other charges and you won’t have to worry about keeping up with repayments. You’re also more likely to think twice before you buy something.

From whom you borrow also matters. You should not borrow money from informal lenders (mashonisas) that do not comply with the law, especially considering the interest they charge and their collection methods.

You should also check your credit profile first by getting a copy of your credit report before shopping for credit. This might tell you if there are some problems that you need to fix before you let your creditors see them. This might have an impact on your negotiations with creditors. You should always have all the information you can before making this type of decision.

What you need to know prior to borrowing is the following:

  • The amount of your loan repayment, which includes the principal, interest and fees
  • The sources of income and/or savings you have to make those repayments

Debt is not our enemy, bad credit habits are. You should use credit well and wisely. In order for you to ensure that you are making the right decision, you should follow the following steps:

Step 1 Look at your budget and determine if you can afford to take credit at this time and how much you have available for credit repayments.
Step 2 Shop around for the best deal. Compare credit products and determine which best suits your needs. Do not be tempted to take more than you need.
Step 3 Look at any hidden costs and check all fees and charges, and read the small print.
Step 4 Ensure that the credit provider you have chosen is reputable and registered. This is important because it means they comply with the law and will respect and protect your rights as a consumer.
Step 5 Once you have chosen a credit provider, go back to your budget and see if you can afford the monthly instalment shown on the quotation, and still have an amount saved for emergencies. If yes, you can proceed.

Loan Shopping Checklist

When shopping for credit, you should make the decision carefully, and not rush into a decision that could have a big impact on your financial health. That is why you should ensure that the credit product suits your needs and pocket.
  • Why am I borrowing? Is it a need or a want?
  • What is the total amount of money I am borrowing? Will it be enough (does the amount match my need)?
  • What is the amount that I will pay every month, and can I afford it for the full term of the credit offered?
  • How stable is my income or employment? Do I see a foreseeable change in my income due to life events?
  • What are all the fees and costs associated with this credit product? Can any of these be negotiated?
  • What is the total cost of the credit for which I am applying, and have I compared quotes from different reputable and registered credit providers?
  • Is it a fixed rate or a variable rate product (based on the prime rate)? How often can the rate change? How often can my payments change?
  • For mortgage loans: Does my payment include only principal and interest, or are my property taxes and homeowner’s insurance premiums also included?
  • When the term expires, will the balance be completely paid off or will there be a balloon payment due?
  • For credit cards: What are the charges for purchases, balance transfers and cash advances, and how and when might those rates change? Are there any other costs associated with my card, such as late payment fees or an over-limit fee?
  • With all these costs and fees added, as well as value-added features such as credit life insurance, can I still afford the monthly payment?