Settling debt or taking on more debt should be part of any financial growth strategy.
Settling your existing high-interest debt can often provide a better return on your money than putting your spare cash into an investment.
On the other hand, taking on new debt to buy an asset that has the potential to appreciate or generate an income (be it a rental property or a business) could accelerate your growth significantly, while also providing you with certain tax benefits.
In this edition of our 2023 investment series, we unpack the differences between good and bad debt, explore how to secure the best interest rates, how to build and maintain a good credit score and look at different ways to settle your debt to accelerate your investment journey.
While debt often carries a stigma, not all debt is bad. In fact, if used smartly, debt can be a great tool to accelerate your financial plan and wealth creation. Debt can also be an efficient tool to optimise tax, and if you manage your debt well, it can help build your credit profile, which in turn will unlock access to more finance.
The trick is to know which type of finance to use for what purpose, and to differentiate between good and bad debt to avoid the latter.
There are a number of factors that influence the interest rate you are offered. Here are three ways to ensure you get the best rate for you:
Choose the right loan.
Secured debt is cheaper than unsecured debt, because it’s less risky for the bank. If you own a home, leveraging the asset through a home loan, a re-advance or a further loan is typically your cheapest form of funding.
Maintain a good credit score.
In general, the higher your credit score, the better your rate. There are several steps you can take to improve your credit score. Download The Essential Guide to Money Management to find out more.
Apply directly through your banker.
While agents (mortgage originators and car dealerships) are always eager to assist with loan applications, the commission they earn gets factored into your interest rate. By applying directly through your banker, you will not only receive an equal service, but are likely to receive a better rate.
Your credit score and the other information in your credit report help credit providers evaluate your risk profile to determine whether they should extend credit to you and, if so, how much. But it is not only credit providers that use credit bureau information.
Other service providers, including insurance companies or telecoms, landlords and even your employer, may look at your credit record before entering a contract with you. Generally, the higher the score, the better. But, a lower score does not mean that you are a high risk. It could just highlight the fact that you have not borrowed money recently, and that there is not a lot of information about you.
So, if you are planning to borrow money in future – for example to buy a house – it is better to pay attention to your credit score and record now, and take steps to improve it where you can.
Other knowledge-sharing sessions in the Nedbank 2023 Investment series
Part 3: Finance that lets you dream big
Part 5: Managing your short-term needs