Sometimes the desire to borrow arises from the social environment you are in, but does not reflect your real needs. Getting into debt should be reserved for ‘big’ life events, such as buying a car or a home or expanding your business. But many of us get ourselves into debt with things we do not really need, because we want something now and are not able to delay gratification long enough to be able to afford what we desire. Granted, there are occasions where borrowing is the only choice, and for that reason, responsible borrowing is a very important skill to learn.

What is responsible borrowing?

Responsible borrowing can be defined as having done a proper needs analysis: the affordability and cost of the loan.

Borrow responsibly, because by doing so…

• you can afford the repayments since you have budgeted for these expenses
• you have peace of mind and less worries about your finances/debts
• you avoid over-indebtedness
• you are able to build up a good credit record which makes it easier for you to get future loans from trustworthy financial institutions

USEFUL TIP: REMEMBER!

Whatever the purpose of the loan is, the borrower should ensure that she/he understands the terms and conditions of the loan agreement.

There are a lot of different ways to borrow money. Before borrowing it is important to find out about the different options available so that you can make an informed decision on the best option for you.

Types of Borrowing

Name	Explanation	Where to get it
Retail credit	Credit given to a customer by a retailer to buy items such as furniture, clothes and food. There are more costs involved than just interest. Ensure that the fine print (terms & conditions) is read and understood.	Furniture, clothing, electronic and other consumer stores (retail shops) & Commercial banks
Instalment/ Personal loan	A loan that has to be repaid with interest in equal periodic payments.	Commercial banks & micro-lenders
Overdraft	An overdraft allows a customer to continue withdrawing from his/her account even though the balance is zero. Basically, the bank allows the customer to borrow a amount of money at a specific interest rate and/or cost for a pre-determined period.	Commercial banks
Family / Friends	You can borrow money from family or friends at no or low cost. It is however im- portant to remember to repay the borrowed money as agreed.	Family / Friends
Payday loan	A payday loan is a loan given by a micro- lender. It is called a payday loan, because you generally borrow just enough to get through to your next payday, upon which the repayment is due.	Micro-lenders
Pawn loan	By entering a pawn loan you pledge an item or asset for a specific amount of money. The pawn loan money has to be repaid by the end of the period with additional interest. If you fail to repay, the ownership of the item changes.	Pawn shops

Please note that whatever type of borrowing you decide to go for, no borrowing is for free!

Consider the following basics before borrowing:

Necessity – do I really need to borrow?

Affordability – can I afford the repayments without compromising my other financial commitments?

Financial institution – am I borrowing from the right financial institution relative to my needs? Does the product suit my needs best?

Repayment term – how long would it take me to repay the loan and can I afford to pay over the recommended period of time?

Interest rate – how much is the interest rate?

Hidden fees / other costs – does the lending institution charge any other fees like administration fees, stamp duties, collections fees, or penalty interest?

Credit worthiness / credit record – Is my standing good enough to qualify for the loan? Do I understand the terms and conditions as well as the fine print of the loan product?

Let us see how borrowing in real life works!

Amount borrowed	Annual interest	Repayment term	Monthly repayment	Total amount to be paid back
N$ 15,000	15%	6 months	N$ 2,610.51	N$ 15,663.04
N$ 15,000	15%	12 months	N$ 1,353.87	N$ 16,246.50
N$ 15,000	10%	6 months	N$ 2,573.42	N$ 15,440.53
N$ 15,000	10%	12 months	N$ 1,318.74	N$ 15,824.86

Please note that the longer your repayment term, the more expensive your loan.

USEFUL TIPS:

Go for the lowest interest rate. The higher the interest rate, the more expansive the loan.

Pay back your debts as fast as you can. The longer the repayment-term of the loan is, the more money you will have to pay in total. Remember, if you cannot pay back the money on time it will have a negative effect on your credit record which makes it difficult for you to easily borrow money in the future.

IMPORTANT STEPS TO TAKE WHEN BORROWING

Step 1

Only consider financial institutions that are registered with NAMFISA and Bank of Namibia so that you have the legal right to complain.

Step 2

Do not take the first loan offer but shop around.

Step 3

Find out about the products and services that suit your needs best.

Step 4

Limit yourself to the amount/ goods that you really need.

Step 5

Keep the loan term as short as possible to reduce the total cost of borrowing, but always consider your disposable income.

Step 6

Ensure that you have the required documents for the type of borrowing you have chosen.

Step 7

Make sure that you understand the terms and conditions of the contract. If not make use of your right to have the fine print explained to you. Do not let anybody force you to sign anything you do not understand.

HOW TO GET OUT OF DEBT

Options / means on how to get out of debt Erase your debt by following these steps

1. Get a clear overview of your total debt
2. Reduce some of your daily expenses
3. Prepare and stick to your budget and do not borrow additional money until you have paid off all of your current debt
4. Consider professional support through debt consolidation / debt counselling

Possible consequences of not repaying your debt:

• Anxiety

• Bad credit record

• Assets or collateral might be seized and sold off to cover your debt

• You could be taken to court

• Physical and psychological threats

Remember, over-indebtedness can be avoided through responsible financial management.

ONLY borrow when really necessary and when your financial planning allows you to take a loan.