If used correctly credit can add positive value to your overall financial well-being. But you need to ensure that you understand what the total amount is that you will re-pay and if that amount is reasonable for the need you want to use the credit for, says Ester Ochse, product head of FNB Money Management.

Ochse provided the example of a person borrowing an amount of R100,000 for a period of five years. The quote that you receive from the financial institution says that you get an interest rate of 15% and the monthly instalment is R2,508.46.

Ochse said a credit provider will calculate your instalment amount as follows:

• Capital (or principle) amount – that is the actual amount that you borrow. In this instance, the amount of R100,000.

• Interest rate – that is how much the financial institution is going to charge you for borrowing the money from them. The amount that is charged will depend on your credit score. In this example, the interest rate is 15%.

• Monthly service fee – these are the fees that the financial institution will charge monthly to administer the loan. These normally range from R50 to R115 per month. In this instance let’s assume that it is R69 per month.

• Initiation fee –  That is the amount that the financial institution will charge for the loan documents and admin for starting the agreement. These are also around R1,000 per loan. Let’s assume that this one is R1,207.50.

• Consumer Protection Plan (CPP) – This is insurance that will pay out and cover the outstanding amount on the loan in the event of death disability or temporary loss of income. Let’s assume that in this instance it is R324 per month.

All these amounts add up to the total cost that you will pay for the loan over the term to a total of R50,507.60, said Ochse. This added to the original R100,000 loan would bring the actual total to R150,507.60.