Getting through life without needing or using debt is simply not practical for most of us. How else do you buy your family home, or a car, or pay for your tertiary studies? The reality is that debt is a constant presence in your financial life. And that’s not a bad thing. What is bad is taking on too much debt. So, does that mean a second loan is a bad idea? Let’s look at your options.

Credit for big-ticket items

The first thing to understand about using credit is that not all credit types are designed the same. Yes, the basic idea is the same: you apply for credit, and if approved you pay back the agreed amount for an agreed period.

But as already mentioned, some loans are designed for a specific purpose – like a home, car or student loan. These special-purpose loans were developed because they help consumers to pay for important milestone purchases that just about everybody makes.

When you finish school, your next milestone will be to study or travel the world. When you start a job, you’ll probably want to buy a car. And when you start a family, it’s only logical that you’ll want to buy a house.

The loans are therefore geared to the type and size of the expense. Paying back a home loan over 20 years seems sensible given the enormous cost, but a car that is priced much lower is typically paid back over 5 years.

Revolving credit facilities

After these big-ticket-item loans, typical debt used by most families would include a credit card or 2, a few store cards and possibly an overdraft as well. These 3 are all examples of a revolving credit facility – meaning you’re granted a line of credit up to a specified limit.

So, if you have a credit limit of R10,000 and you’ve used up R4,000 then you have R6,000 still available if needed. Then, when you make a payment at the end of the month – say R500 – you’ll have R6,500 credit available.

The term revolving credit means it is an ongoing process of using the available credit without having to apply every time you need to use it.

Personal loan

The 1 other form of debt that you might use is a personal loan. This is an unsecured loan – meaning you don’t have to put down a deposit or commit valuables as security against the loan. Your obligation is simply to pay back the agreed amount every month for the duration of the loan term.

Bear in mind that a reputable lender will be just as careful to check that you can afford a loan before approving it

The benefit of a loan is that you can use the money in any way you wish. You might want to do home improvements, catch up on home maintenance or major repairs to your car – even buy a second-hand car –  or take a long-awaited family holiday, or to buy the equipment you need to turn your hobby into a side hustle – a loan provides possibilities.

The choice is yours. As is the responsibility to make sure you pay regularly, and on time.

When is a second loan a good idea?

As you can see, we all generally have more than 1 debt that we’re paying off. So, the question is less about whether you should take a second loan but rather how you can use a second loan to your advantage.

Here’s how: if you have different types of short-term debt – essentially anything that’s not a home loan – you could try consolidate them all into 1 single loan.

In effect, you’re taking a second loan, but only to gather all your other debts into 1 single loan – so that you’re only paying off 1 instalment to 1 lender every month, with 1 set of admin costs.

Why would you do this, you ask?

A good reason is to reduce cost, which you’ll achieve if the interest rate on your new loan is lower than the average for all your other debt. Credit cards and store cards tend to have higher interest rates than your average personal loan, so if you use a loan to pay them off, it could reduce your monthly repayment amount and the total interest you pay.

Another way you save is that you’re now paying only 1 monthly loan admin fee. These monthly charges are levied on all credit agreements, so if you reduce 4 or 5 accounts into 1, you’re no longer paying 4 or 5 monthly admin charges.

At the end of the day, what you need to be aware of is your monthly debt repayments

Of course, you may be in the fortunate position of not needing to consolidate all your debts into 1 loan and pay them off, and yet still require a separate loan. Say you wanted to buy an artwork, or invest in a start-up, or buy some other asset that’s likely to appreciate in value. If you can afford it, and you need a separate loan for a specific expense, then a second loan to achieve that goal makes sense.

At the end of the day, what you need to be aware of is your monthly debt repayments. If these are affordable and not placing you under stress, then your debt is being well-managed and you can afford using more debt. Bear in mind that a reputable lender will be just as careful to check that you can afford a loan before approving it – their duty is to help you maintain responsible debt management.

But if you already feel stressed about your debt, then maybe you should speak to a consultant to see how you can restructure your debt to relieve some of the pressure. Contact us on 0860 110 702 for more information or help.