What are people prepared to borrow money for?
A ‘financial literacy’ survey carried out by Wonga SA has revealed some interesting results about what purposes people might use a loan for.
Of the more than 18,000 people canvassed, 83.7% said they would borrow money to fund a house. This is perhaps not surprising as the purchase price of the average home is way in excess of what most people have in savings.
68.8% would be prepared to take out credit to buy a car. Again, the cost of a car is prohibitive for many people, and it is common for people to take out car loans.
58.6% would borrow to pay for education costs. For many, the only way they can afford university tuition fees is to take out a loan. Hopefully, their degree will be the passport to a well-paid job, and they can then comfortably pay off their debt from their healthy salary.
These are all examples of what might be called ‘good’ debt, provided that the amount being borrowed is a sensible amount that you expect to be able to repay.
However, the survey also showed that 5.1% would borrow to fund a holiday, 3.6% would buy gadgets or tech items on credit, and 0.9% would go into debt to buy a fashion item. These are all most certainly considered to be examples of ‘bad debt’.
Borrowing for the ‘wrong’ reasons
We all need to live within our means. We might all want to go on a luxury round-the-world holiday, get the latest gadgets the moment they come out, or wear an item of clothing that just looks great. Problems can also arise when we hear about friends who may be better off financially enjoying a better lifestyle, and they may well boast on social media about where they are going on holiday, or what they have just bought.
Unfortunately, we all have to live within our means, and that includes only buying holidays, gadgets and clothes we can genuinely afford. Items such as these should almost always be bought from our regular income, or from an unexpected windfall – you shouldn’t be borrowing to fund them, and if you are racking up debt for these reasons, how are you going to pay it back?
Some more worrying results from the survey are that 3% of people don’t look at the cost of repaying their debts, 13.7% are ‘maxed out’ and cannot obtain any more credit, and 27.2% could only obtain a further ZAR 5000 (approx. £285) or less of credit.
As a guide, you shouldn’t be spending more than 35% of your net household income on debt repayments. If you live in an area with a high cost of living, you may need to reduce this percentage.
Before you borrow any money at all, ask yourself if you are borrowing for ‘good’ reasons. Whatever the purpose of your loan, you also need to make sure you understand exactly how much the repayments are. You shouldn’t take out any loan unless you are totally confident you can afford the repayments.
Ideally, you should complete a budget planner for all of your household expenditure.
So, before you take out a loan, consider whether you are borrowing the money for the right reasons.