What are the cheapest credit options?

When we need money, we often rush to arrange a loan from an obvious, but possibly expensive, source. There are several credit options to consider, some more affordable than others.

This article looks at which solutions best match specific needs, which factors you should consider when applying for credit, and how to limit your need to borrow.

Tip: Taking out a personal loan is one possible credit option. Explore what this may involve here.

Do you have a once-off or recurring need?

Amika Maharaj, head of business solutions at FNB Retail Loans, says you should only apply for a loan once you’ve determined what your needs are. Are you dealing with an emergency like a burst geyser, or do you need to cover school fees or recurring medical bills? Insurance or existing savings may cover a once-off need – for example, home insurance should cover a burst geyser.

“If the need is for a large expense like renovating your home, you could consider borrowing against your existing home loan,” Maharaj says. “The interest rate on secured credit, like a home loan or vehicle finance, is typically lower than unsecured lending because there’s an asset attached to it.”

Gustav Neethling, director of The Financial Emporium, says you may end up paying more interest on your bond than you would have done if you hadn’t accessed the funds, but borrowing from an access bond is quick and efficient if you have a pre-existing surplus.

Short-term solutions

Maharaj says personal loans can assist both with once-off needs and fixed monthly commitments. They provide a measure of certainty in terms of what your monthly repayment would be, but it’s important to make sure your bank offers you a preferential interest rate.

A temporary loan is a good alternative to a personal loan if you need a lower-level, short-term solution, and you are sure you can clear the debt within the month. Your bank automatically deducts the amount you borrowed from your next salary.

“Temporary loans have an initiation fee at take-up, but they don’t charge interest,” Maharaj points out.

If you’re looking to simplify and settle various debts, you could consider debt consolidation. This involves repaying your current debts by taking out a new loan, generally at a lower interest rate. You may be able to unlock additional cash flow as you won’t be paying multiple fees – you pay a single monthly service fee and a single instalment on your loan, says Maharaj.

The danger here is that you turn short-term debt, like a store card payable over six months, into a long-term debt payable over three to five years.

“In the long run, you could be paying more interest on this loan than is necessary,” warns Sylvia Walker, financial planner and author of Smartwoman: How to Gain Financial Independence and Create Wealth.

Finally, you can consider borrowing money from a family member or friend, which may mean you pay little- to no interest.

“Think carefully about going this route, though, because you’ll put a strain on the relationship if you can’t pay the money back,” says Neethling.

Loans for recurring needs

Maharaj says banks offer transactional products with embedded credit, which means you can get up to 30 days interest-free on card purchases, and only pay interest on non-card purchases.

“Having your salary coming into this product will ensure that your limit will be available to use without you having to reapply for credit,” she says. You should, however, check if the product offers a lower monthly account fee, and also look into the interest rate, which can be high on overdraft facilities.

A credit facility linked to a transactional account provides you with a safety net if you’re running out of money ahead of payday. “This facility can protect you against bounced debit orders and help protect your credit profile, as well as save you late payment fees,” says Maharaj.

A revolving loan facility can also be used to cover smaller or larger expenses you can’t cover with your next salary. Check if your bank offers shortfall protection, which will automatically transfer funds from your credit facility into your transactional account as needed.

Credit cards can be useful as they offer interest-free periods, sometimes up to 55 days.

“If you use them cleverly for your day-to-day purchases, and you settle your outstanding balance in full every month, you could benefit by paying no interest,” Maharaj says. “Your bank may also allow you to take out a credit card with a transactional account and pay one monthly account fee.”

However, if you incur interest, it’s likely to be high on this product.

Reduce your reliance on credit

Before committing to a loan, you should always consider the interest rate and repayment terms.

“A worst-case scenario is to take on debt with a high interest rate and a long repayment term,” Neethling says. “As a starting point, work out the amount you should be able to repay on a monthly basis, then calculate the ideal repayment term, and the interest rate that would work for you.”

If you’re using debt to settle debt, you need to make lifestyle changes that will get you out of the debt cycle, which can erode your wealth.

“The golden rules are, spend less than you earn, face up to your debt, and come up with a plan to get out of debt,” Neethling says.

Walker says making some long-term changes, such as driving a cheaper car, renting out a room, or cutting up your store cards, could help you to reduce debt.

“Break the pattern of needing to go into debt, and learn from the experience,” she advises.

Tip: If you’re over-indebted, debt consolidation may be a good solution for you. Find out more here.