Before we get into the grit, it’s important to know that not all debt is unhealthy debt and it can be a useful financial tool. However, even good debt can be unhealthy if you can’t afford to pay it. Make sense? Probably not. Let us break it down for you...
Most common debt
Here’s the scary thing: South Africa is one of the most indebted countries in the world. We don’t tend to save a lot either. So in order to avoid becoming one of the statistics, it’s a good idea to start educating yourself about finance (hey, you’re here, so that’s good!). The most common types of debt in South Africa are fixed-term agreements (think home loans, personal loans and cellphone contracts), vehicle loans, credit cards and our least favourite, store card debt. These can be further divided into two categories:
1. Secured debt
This is debt that you have that you’ve secured an asset against. Your home and car loans fall under here, because if you stop paying the debt, that home or car will get seized. Because the lender is taking less risk (the creditor can take your stuff if you don’t pay), it generally has a lower interest rate.
2. Unsecured debt
This is debt that doesn’t have an asset secured against it. Think credit card debt, student loans (although if your parents sign surety on the loan it becomes a sort of secured loan), and store cards. But don’t assume because there’s no asset attached that you can skip on your monthly payments. This kind of debt usually has a higher interest rate, which means that the longer you take to pay the amount off, the more it costs you in interest payments, and the deeper you get into debt. Basically, you’ll be endangering your best asset (spoiler: it’s you).
One more thing you should know - depending on who lent you the money, your debt can be sold to a third-party debt collector to hound you if your payments are late. Yikes! 😱 So these are the types of debt. What you may want to figure out next, is whether the debt you have is good or unhealthy (yes, some debt can be considered “good”). Read on to find out!