Loans � beware of �Special Offers�
Correspondent | Monday February 1, 2016 15:25
We’ve all had the feeling of being disappointed when something doesn’t live up to our initial expectations. When we’re talking about money matters, some financial products make attractive claims on the surface, but disappoint when you read the small writing inside.
Special Offer - What Does It Really Mean?
Whenever you see the words: “special offer”, think carefully and do your homework. It is important to make sure you understand exactly what is being offered.
Sometimes we can be fooled into buying something, or taking a loan, because what they say on the cover makes it look like the deal of the century, in your favour. But is it?
We need to learn what the terms of a loan are, what the specials actually are, and what they mean in actual costs.
You’re allowed to ask as many questions as you like when making a purchase or taking out a loan. If you’re not getting the answers that you need, consider walking away from the deal as it may turn to not be in your favour.
Payment Holidays
Bank X is offering the latest and greatest payment holiday special valid until the end of June. They’ve told you that you may qualify for this special, but only if you have been making your monthly payments on time every month.
You’ll then qualify for a premium holiday, which means you won’t have to pay any more premiums on your loan for the next six months.
Ask yourself: “Is this too good to be true?”
The ‘catch’ in this situation is that when you owe money to a creditor you always pay interest on the outstanding balance – the amount you still owe.
If you take a payment holiday, this means you don’t make the repayment for six months. It doesn’t mean that the interest stops. So over that six month period, there is six months’ worth of compounded interest… Compounded means that interest is charged on the last month’s interest that you missed paying!
What does this actually mean?
Let’s take a look at a made-up situation - Mr Able’s debt with Bank X.
Mr Able still owes P6,000 to Bank X at the end of May. His repayment is P600 every month. The interest rate he is paying is 25%pa (25 thebe interest on each 1 pula owed each year).
If Mr Able carried on as normal and made his next payment of P600 in June, P125 of the money pays the interest, and P425 pays the debt, and reduces the amount owing. So the next month he will owe Bank X P5,575.
However, Bank X offered Mr Able a six month premium holiday, starting in June and running until the end of November. Mr Able will only start paying again in December. It sounds like a good deal, but what will his loan look like with all the compounded interest on it by December?
As the interest accumulates, instead of owing P6,000 by the start of December he will owe P6,790 - in just six short months.
If Mr Able had continued to pay off his loan at P600 per month, at the start of December he’d only owe P2,997 – more than halfway to being debt free.
It’s No Secret
Commercial money lenders make their profits from interest on loans.
The reason banks, stores and micro lenders offer you payment holidays, is they know they’ll make much more money from you for the same debt! All they have to do is be patient. They’ve found a way to get you to pay them even more, and even make you think you are benefitting.
Think: does this payment holiday have any real benefit for me?
The one time that it might be beneficial for you to take a holiday on your loan is if you need to use that money to help you pay off another more stressful debt more quickly. Remember – if you have more than one debt, prioritise those that cause you the most stress, and that are the most expensive in terms of the interest rate.
Top-Ups
We often hear offers from loan providers: “pay your loan every month on time, and get the opportunity to “Top-Up” your loan.”
Now, unless you need that money for a very good reason, “Topping Up” your loan is just borrowing more cash, that you are going to have to pay back with even more interest.
Beware
It is always wise to take some time to really think about what specials are being offered by loan providers, to make sure it is actually going to benefit you. You must first think why you want to take advantage of the special. Do you really need it, and will it really help you financially?
Then you must calculate what the costs really are – what will you have to pay? If you don’t know how to calculate it, ask your loan provider. Never be afraid to ask questions. They’re selling you the loan so they can do the work and the calculations.
By looking carefully, you should be able to see if it’s a trick to get you further into debt, or a real benefit to you.
Author: Kagiso Awuonda is a financial wellness trainer with S.C.I. Training (Pty) Ltd. © S.C.I. Training runs BOTA (BQA) accredited financial wellness programmes in Botswana. For help and information contact them on 3180111 or 72949124 or kk@wellness.co.bw.