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SIMON BROWN: I’m chatting now with Pravesh Sunker, CEO of FNB Private Wealth and RMB Private Bank. Pravesh, I appreciate the early morning time. We’re talking around using credit to build wealth, something which I think a lot of people look at with a bit of fear, but equally with the idea of ‘hey, this could actually really work’. I suppose the first question is what sort of credit would you be talking around in terms of using it to build extra wealth?
PRAVESH SUNKER: Simon, thanks for the opportunity. When people talk about using credit we always assume that it’s long-term debt. But if I could take a minute I’ll tell you how I would use credit, even when I’m building my wealth in an early life stage. If I think about it, we look to save for an emergency to provide for education, to protect our family in terms of life cover, medical aid and funeral cover. People’s debt repayments can increase and go up to about 80% of one’s monthly income, which is quite a staggering amount, and you’d think that you would have very little saved for those things that are mentioned.
Now, using credit wisely can reduce your debt repayments or allow more cashflow for those savings that I mentioned – as an example, swapping between secured and unsecured lending.
Unsecured lending is extremely expensive compared to secured lending. Do you use short-term debt or long-term debt? All of this requires careful thought when taking out a credit facility.
And that’s why I encourage people to seek advice for credit, as well as investments and insurance.
Now, using credit wisely can reduce your debt repayments or allow more cashflow for those savings that I mentioned – as an example, swapping between secured and unsecured lending.
SIMON BROWN: I take your point, this isn’t going to, [to use] a horrible phrase, a loan shark, borrowing R1 000, putting it in the market and hoping for the best. This is saying, hang on a second, I’ve got debt I’m paying off every month – and pretty much I imagine all South Africans have some sort of debt. Can I be smarter about that debt that I have, and that then frees up cash?
PRAVESH SUNKER: A hundred percent. If I use an example, if I need money on a short-term basis to pay for a student loan or for my upcoming student fees, do I use unsecured debt or do I take out an extra bond on my property? If you take out an extra bond – let’s assume the repayment period is the same as that of unsecured debt – your interest rate theoretically should be lower than unsecured debt because the bank has security. That improves your cash flow, which allows you to save and repay your debt much sooner.
SIMON BROWN: Exactly. My sister for an important reason was looking for an unsecured loan. The interest rate was going to be quite onerous. She then took money out of her bond instead. I think the interest rate was going to be 24% for unsecured. Her prime rate, I suppose is what, 10.5% or so – [a] significant saving for her and, and not to pay it back over the 20-year period. Of course, you don’t want to pay a student loan over 20 years.
PRAVESH SUNKER: That’s why I mentioned keeping the repayment period the same as an unsecured debt, but having a lower interest rate significantly improves your cashflow month on month.
SIMON BROWN: And if we look across – and this goes back to sort of classic bank managers, where way back in the day you would go in to your bank branch for a loan of sorts and have a conversation with a bank manager. We’ve kind of moved on from that, but you’re almost suggesting hang on a second, there’s actually something there because the bank consultant, maybe not a manager, is going to be totally up to speed. This is their area of expertise. We just typically look for the easy route, rather than saying, hang on, is there a smarter way to do this?
I like the idea of taking debt as something which isn’t sort of kept in the corner, saying that this is actually an important part of growing long-term wealth.
PRAVESH SUNKER: Well, that’s why FNB introduced the concept of integrated advice. Historically, financial advice was synonymous with investments and insurance. We say, hang on, people need advice across banking, borrowing, investments and insurance. So our private advisors at FNBI are skilled to give you advice across those four pillars that I mentioned, including lending, which I believe is the trigger to better cash flow, and then better investment and insurance decisions.
SIMON BROWN: Okay. I like that. It’s a global view, because the key point here is that the idea of having no debt is perhaps sweet, but truthfully few of us are going to be able to afford a home or a car or a lot else without some level of debt. You even mentioned student loans. Things are expensive out there. We’re going to have to need it.
I like the idea of taking debt as something which isn’t sort of kept in the corner, saying that this is actually an important part of growing long-term wealth, but also long-term human capital, you are IP’d again, student loans.
PRAVESH SUNKER: I agree. And if you look at any company, their optimum capital structure includes a bit of equity and a bit of debt. So debt is being used to grow your balance sheet, grow your net asset value. Similarly [for] individuals who use debt wisely to grow their net asset value. However, in the South African context, we always assume that advice is for the wealthy, for the rich, and that you must have assets before you can leverage. I’m saying when you’re building wealth, using debt wisely can help you accelerate your wealth creation.
SIMON BROWN: And that’s a great point. Usually a lot of folks in the personal finance space will say have no debt. What you’re saying is, hang on a second, have clever debt. Maybe that’s the better answer. It’s the type of debt rather than just that loan-shark sort of debt.
PRAVESH SUNKER: It’s very difficult when creating wealth to have this concept of no debt. We all need a bit of leverage to help us grow. A first house will be very difficult for a student coming out of university to finance out of cash. So debt is part of life, but managed properly it can help you accelerate your wealth creation.
SIMON BROWN: Pravesh Sunker, CEO of FNB Private Wealth and RMB Private Bank, I appreciate the early morning insights.
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