Although the NCA protects you to some extent from exploitation, many conditions that are camouflaged in the fine print of a loan agreement could come back to haunt you.
In terms of the Act, you must be informed in clear language of all the issues that affect your debt. This puts the onus on you to read all the documents before you sign anything. And you must understand the implications of what you are signing.
Nowadays, most businesses that sell goods on credit are more akin to financial services companies than traditional retailers. The financial products that are sold around the product are where the profits lie for the retailer. And the consequence is that you could pay 10 times more for an item than you would have paid if you had used cash. The retailer will:
· Either earn interest on the loan itself or in effect receive a kickback or commission from the financial institution that provides the credit.
· Earn commission on the life assurance it will insist you take out to cover the debt. But remember that you cannot be forced to purchase assurance from the retailer or from a company of the retailer’s choice. Credit life assurance is the biggest money-spinner in the life assurance industry. Life assurance bought directly from a life assurer is likely to be far cheaper. Here are a few rules to avoid needless payments:
* Never take out credit life assurance for a period longer than the period over which you must repay the debt.
* Never take out credit life assurance for an amount greater than the debt.
* Preferably take out credit life assurance where the value of the benefit declines in tandem with the outstanding debt.
* Always insist on getting quotes via a financial adviser who is independent of the retailer.
* Remember that the commission paid on credit life assurance is calculated by multiplying the premium and the term of the assurance by a certain factor. So the bigger the premium and the longer you pay, the greater the commission.
* Always pay the premiums on the life assurance separately from the principal debt on the product. Most times the premium is added to the principal debt, and you pay interest on the larger debt.
· Earn a commission of up to 22.5 percent on short-term insurance. You will be required to take out short-term insurance, but again you can choose the product provider. And again, beware of premiums being added to the principal debt, which will result in your interest bill climbing.
· Make a profit by selling you extended guarantees and service plans. In many cases, you do not need an extended guarantee.
· Apply other charges, such as administration and penalty charges – even if you pay back the debt early.
Source: Sanlam
Thursday, November 25, 2010
Thursday, November 18, 2010
Financial mistakes people make
Most South Africans simply do not save. According to the Reserve Bank’s December 2009 quarterly report, gross savings by households as a percentage of gross domestic product increased marginally from 1.4 percent in the second quarter of last year to a still pathetically low 1.5 percent in the last quarter.
The Reserve Bank says the increase was not because people suddenly discovered the need to save but was a consequence of “tight economic conditions and stricter lending criteria on the part of banks”. And if it were not for compulsory savings, such as contributions to occupational retirement funds, the figure would probably be negative.
It is important to have savings to meet your:
· Short-term needs, such as to pay school fees or to replace a stove that has packed up. You should also aim to build up an emergency fund equal to about three times your monthly disposable (after-tax) income so that you have a financial cushion in a crisis, such as writing off your car or losing your job.
· Medium-term needs, such as a new vehicle or to put down a deposit on a home. You should aim to save a specific amount of money within a fixed period. Use any windfall, such as bonuses or tax refunds, to top up your savings.
· Long-term needs, which essentially mean retirement – without a doubt your biggest single savings requirement. As with risk life assurance, as a rough rule of thumb you should aim to have saved between 15 and 20 times your annual salary at retirement, depending on your age and number of dependants. For most people, this means you will have to save for at least 40 years, from your first pay cheque.
It is a long-term slog to achieve financial security in retirement and not many people attain it, because they do not stick to the basic rules.
The question arises why most people reach retirement with a net replacement ratio of only 28 percent. The main reasons are that people:
· Are not forced to save for retirement. Many employers do not have occupational retirement funds, and many contract workers, part-time workers, domestic workers, seasonal workers and self-employed people do not save for retirement through formal retirement-funding vehicles.
One of the aims of the government’s retirement reforms is to force every person in formal employment to save enough to provide a net replacement ratio of at least 40 percent.
· Save too little. Alexander Forbes says 17 percent of members of occupational retirement funds have contributions (employee and employer) of less than 10 percent of their pensionable income, while 40 percent have contributions lower than the 12 percent sought by the government in its reform proposals.
· Start saving too late, losing the advantages of compounded investment growth. Research by Alexander Forbes shows that most fund members retire with as few as five to 10 years of pensionable service; 12 percent retire with between 10 and 15 years; 14 percent with between 15 and 20 years; and only seven percent with between 35 and 40 years of pensionable service. On average, pensionable service of the last fund prior to retirement is 19.5 years for men and 15.8 years for woman.
If you leave a job and opt to take the savings you have accumulated in your employer’s occupational retirement scheme, you need to reinvest your savings to ensure you will be financially secure in retirement.
Source: Sanlam
The Reserve Bank says the increase was not because people suddenly discovered the need to save but was a consequence of “tight economic conditions and stricter lending criteria on the part of banks”. And if it were not for compulsory savings, such as contributions to occupational retirement funds, the figure would probably be negative.
It is important to have savings to meet your:
· Short-term needs, such as to pay school fees or to replace a stove that has packed up. You should also aim to build up an emergency fund equal to about three times your monthly disposable (after-tax) income so that you have a financial cushion in a crisis, such as writing off your car or losing your job.
· Medium-term needs, such as a new vehicle or to put down a deposit on a home. You should aim to save a specific amount of money within a fixed period. Use any windfall, such as bonuses or tax refunds, to top up your savings.
· Long-term needs, which essentially mean retirement – without a doubt your biggest single savings requirement. As with risk life assurance, as a rough rule of thumb you should aim to have saved between 15 and 20 times your annual salary at retirement, depending on your age and number of dependants. For most people, this means you will have to save for at least 40 years, from your first pay cheque.
It is a long-term slog to achieve financial security in retirement and not many people attain it, because they do not stick to the basic rules.
The question arises why most people reach retirement with a net replacement ratio of only 28 percent. The main reasons are that people:
· Are not forced to save for retirement. Many employers do not have occupational retirement funds, and many contract workers, part-time workers, domestic workers, seasonal workers and self-employed people do not save for retirement through formal retirement-funding vehicles.
One of the aims of the government’s retirement reforms is to force every person in formal employment to save enough to provide a net replacement ratio of at least 40 percent.
· Save too little. Alexander Forbes says 17 percent of members of occupational retirement funds have contributions (employee and employer) of less than 10 percent of their pensionable income, while 40 percent have contributions lower than the 12 percent sought by the government in its reform proposals.
· Start saving too late, losing the advantages of compounded investment growth. Research by Alexander Forbes shows that most fund members retire with as few as five to 10 years of pensionable service; 12 percent retire with between 10 and 15 years; 14 percent with between 15 and 20 years; and only seven percent with between 35 and 40 years of pensionable service. On average, pensionable service of the last fund prior to retirement is 19.5 years for men and 15.8 years for woman.
If you leave a job and opt to take the savings you have accumulated in your employer’s occupational retirement scheme, you need to reinvest your savings to ensure you will be financially secure in retirement.
Source: Sanlam
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