Manage your debts wisely

June 2023

JENNY MATHEWS, MANAGEMENT AND DEVELOPMENT SPECIALIST AND EDUCATOR

Borrowing money is something most of us must do on occasion, particularly in agriculture. However, keep in mind that a loan must be paid back, most likely with interest.

A loan is the money you receive from a financial institution in exchange for a commitment to repay the principal amount with interest. Lenders take the risk of a possible default; therefore, they charge a fee to offset this risk – and this fee is known as the interest. 

In a secured loan, you need to pledge collateral to get the loan. So, if you default or do not pay back the loan, the lender has a right to take possession of the asset that had been pledged as collateral. An unsecured loan does not ask for collateral. If you do not pay back the unsecured loan, the lender has no right to take anything in return. An agribusiness loan can assist to purchase a property, plant a crop (with an inputs production loan), buy new machinery and equipment, upgrade breeding stock, overcome cashflow shortages and fulfil a range of other funding needs.

When you borrow money, you must know you have taken on a commitment to repay it – so manage every cent responsibly. Develop and follow an affordable budget. Understand your ability to service debt.

Make sure you are getting a competitive and reasonable interest rate. Read and understand the documents you are signing. Understand the actual cost of borrowing. Understand what it means to give your property as security for a loan and the repercussions of failing to honour your financial obligations. There are many situations in which people borrow money and are not even aware they have pledged their personal property as collateral for the loan.

Paying back your loan on time is important, as it can affect your loan liability and your credit history. Your debt repayment history shows other banks and lenders that you have either paid on time or not. Missing loan repayment dates has a negative impact on your credit health. Paying on time will help you to build a positive credit history, which is increasing your chances of being approved for a loan with a lower interest rate.

Publication: June 2023

Section: Pula/Imvula