Credit allows you to borrow money or access goods and services with an agreement that you will pay within an agreed time period and you will pay with interest.
Secured Credit or Lending means the lender holds or accepts one of your assets such as your car or home, as surety in exchange for giving you the loan. In cases where you default (do not pay the debt) the lender has a right to take possession of your asset in order to recover their loss due to your non-payment. Examples of secured credit are home loans and vehicle loans
Unsecured Credit means that the lender does not have any assets or possessions to hold on to in exchange for giving you a loan. They take your promise and consider factors such as your credit score/history. Interest maybe higher since you have not pledged any of your assets as security. Some examples of unsecured credit include:
- Short term loans
- Personal loan, micro-loans
- Retail Store cards
- Credit cards
- Check if you really need the item you are taking credit for or if you can budget more carefully and save and buy the item in cash later.
- Check the TOTAL amount you will be charged including interest and service fees.
- Ask for quotes or pre-agreement from various credit providers and compare the interest and fees you will be paying before signing a credit contract. Various lenders may charge you a different interest rate, this also depends on your credit rating and the history of how you have repaid the debt in the past.
- The quote or pre-agreement will show the total capital amount, the interest to be charged, the duration or term of the loan, the service fees to be charged and any other charges such as charges for credit life. Remember don’t only check the monthly instalment you will be paying but also the TOTAL amount you will pay over the loan term.
- If you constantly need to use credit for your monthly expenses such as food and rent, review your budget and see if there are adjustments you need to make to the budget
- In the next topic, we will discuss how to handle repayments when you have taken credit and what you can do if you are not coping with your repayments.