South Africans are struggling and many people are turning to personal loans to cover the necessities.
As always, it’s best to have as much information at your disposal, so that you can make the right decision if and when the time comes to take out a personal loan.
Secured vs unsecured
Personal loans are an example of unsecured debt, as you don’t need any security or collateral (house, car) to apply for this type of loan.
A home loan is an example of secured debt. If you have a home loan with a bank and you don’t repay the loan as per the credit agreement, then the bank has the right to repossess the asset (house).
Different types of loans
Conventional personal loan: You can either apply for a shorter or longer repayment term.
Usually, the larger the amount, the longer the term.
Interest rates on a personal loan can vary from 3% to 30%.
Try and get a fixed interest rate on your personal loan so that your repayment remains the same and you know exactly what to budget for.
Payday loans: These loans are normally short-term loans that are taken and repaid on your next payday.
The full repayment term is normally 28 days. These loans are expensive as interest rates are high.
Consolidation loans: This is simply one loan amount taken to cover multiple debts.
Essentially, you have one big debt, paying off smaller debts.
You have to do your calculations very carefully here, especially since these loans also come with quite large initiation, admin fees and long terms of repayment.
You have to ask yourself if it is worth putting an existing balance on which you might only have six more months to pay, under a consolidation loan with a 60-month term.
VEHICLE FINANCE: With vehicle finance, the term normally ranges from 12–72 months.
body.copy.three...: The longer the term, the lower the installment – but the more the final interest paid.
You also have the option of a “balloon payment” where the installments are less, but you have to pay a final lump sum at the end of the term.
This method could generally end up costing you more.
Home loans: Most home loans require a deposit, though some institutions require at least a 10% deposit.
Interest rates are low now, so this might be a good time to get a home loan, but it is wise to take into account that interest rates fluctuate – so either opt for a fixed interest rate or make enough provision in your budget for when interest rates rise.
Student loans: A student loan covers educational costs from one year to the next.
It includes text books and accommodation.
You will normally have to pay back the monthly interest on the loan while you are studying and start paying back the loan in its entirety once you get a job.
Tips when taking out a loan:
Credit report: You are entitled to one free credit report from the credit bureaus once a year.
Make sure that you get this so that you will have a good idea whether you will even qualify for any loan you wish to apply for.
There is practically no use in applying for a loan if you have a credit report filled with judgements and bad payment history.
However, if you have no judgments you might be pleasantly surprised by your credit report.
Some bad payee information gets removed after a certain period of time, so it’s always good to just get your credit report and take it from there.
See the bigger picture: Don’t just sign and take out a loan because you are desperate.
Make sure that you know the interest rate, the repayment term and monthly installments.
Remember you are not paying back the amount you are borrowing. Depending on the interest rate, you could be paying back much more than that.
Insurance: Make sure that you have loan protection insurance in the case of death, disability and retrenchment.
Make sure that you can afford it. This means that you shouldn’t only be honest with the bank or creditor, but with yourself as well.
You know your finances and your budget better than anyone else.
Don’t take out a loan in the hope that you will find money to pay it or “make a plan”.
Don’t take out one loan to cover another loan. Debt can be a dangerous spiral.
It really is best to be honest about your affordability.
Research, calculations a vital part of the process
*Moeshfieka Botha is Head of Research and Consumer Education at National Debt Advisors. For more debt and personal finance information visit www.nationaldebtadvisors.co.za