Banks back low-income earners
UNTIL recently, you needed to earn quite a fortune to enjoy some of the benefits that a bank offers such as access to a credit card, personal loans, vehicle finance and home loans.
However, times have changed and so have banks' perception of risk and their approach to lending. These days a good credit record and stable income can enable you to borrow a micro-loan from any of the major banks, regardless of whether you are a high earner or not.
The decision to increase the pool of borrowers is an important victory for bank customers and of course it also makes good business sense for banks too.
Additionally, it is a key ingredient in growing a healthy economy.
Evidence has shown that stimulating economic growth and development in a country goes hand in hand with increasing people's ability to access financial services.
So, it all starts with an active bank account where you deposit or withdraw money from. Armed with this bank account and evidence of a steady income, you can now borrow to finance some of the things that you need.
It is of course cheaper to borrow money from a bank or another registered lender than an informal and unregistered micro-lender, unless you have family that can assist.
But borrowing from family or friends comes with its own set of problems, such as perceptions that you can't manage your finances or being the talk of the town.
To avoid such unpleasantness, it's sometimes best to approach a bank. The interest is far lower than the one you will be charged by an unscrupulous lender who does not have to account to a regulator about the charges he/she levies on loans.
So, now that you qualify and you can get the loan, what to do with the money? As you know, a bank will not tell you how you should spend your loan.
However, as you will have to repay it at some point, it's wise to carefully consider what you take out a loan for. It is always a good idea to take a loan to finance things that you need but cannot pay upfront for.
For example, we all need a secure roof over our heads but few of us can afford to pay cash for a house. A house is a good debt because should you decide to sell it after some years, you stand to make some money out of the sale.
It also makes sense to borrow to buy other big items that would otherwise take all or most of your cash savings if you were to pay upfront for them. An example that comes to mind is a car; chances are that you can't pay upfront for it.
So the best thing to do is borrow from a bank to buy the car.
If you go this route, make sure that you can comfortably afford the monthly instalments, taking into account petrol, maintenance, children's school fees, living expenses and bond repayments.
Before lending money banks will always check affordability of repayments to avoid consigning a consumer to a debt trap.
For your part, always pay the full monthly instalments or more if you can as this will reduce the repayment period and save you a lot of money on interest.
If you have debt it is almost always better to pay it off before saving as the interest on the loan is likely to be higher.
Having said that though, if you can earn a much higher interest on an investment than the interest on a loan, it does make sense to borrow to finance that particular investment.
This way you are not borrowing to finance consumption, but taking a loan to build and increase your financial fortunes - which is always a good thing.
- Barnard is director of inclusive banking at Standard Bank.