Beware of funky financing: Imara Asset Management

This is the view of Imara Asset Management, a company that specialises in financial advice.

Complexity

"Funky finance' typically involves a financial instrument that looks attractive, but is more complex than it appears and is poorly understood by the buyer.

"It might be a derivative traded globally, but could equally be a credit- or asset-based finance package designed to enable the purchase of a big-ticket item like a car," says Imara MD Lara Warburton.

Credit appetite can sometimes be whetted by "creative" financial structuring on the funky financing model, notes Warburton.

"SA's household-debt-to-income ratio still hovers around 80%," she points out. "This means many families can't afford to pay cash and need credit to buy expensive items.

"Financial structures can sweeten the deal by keeping monthly payments affordable. But things can go sour when the transaction's full implications become apparent or the full term of the contract puts a dent in future plans."

Financial product purchase

Warburton adds that consumers are not just buying big-ticket items; they are buying financial products as well. "They test-drive the car, but rarely 'test-drive' the funky finance package."

She warns consumers not to focus solely on "affordable" monthly payments and urges them to establish the basic cost of the purchase items.

She adds that the full cost should be established when all credit charges and fees are layered on top and then consumers should compare total and basic costs.

"Be clear about the term - how many months and years will you be paying?"

Check liability

Warburton also suggests that consumers check their credit cost liability.

"For example, if you pay off a car in three years, not five, do you still have to pay the credit costs of years four and five?"

Warburton adds that the global credit crunch was a wake-up call for business and families.

"Since then, many families have performed wonders by paying down debt.

"It would be a pity if 'funky financing' at consumer level undid the good work. Credit may sometimes work in your favour. But make sure you understand the debt you take on. If you don't understand it, how do you manage the risks?"

Warburton says that international banks learned that lesson and consumers should too.