Personal Loans

Your comprehensive guide to personal loans

Navigating the waters of personal finance can be daunting, especially when you’re confronted daily by hundreds of lenders offering access to products that can help you make your dreams a reality.

Unfortunately, if you don’t know what to look out for, those opportunities can quickly turn into nightmares and years of debt counselling.

The information shared here is aimed at helping you understand how different types of personal loans work, the costs involved, and ways to manage your credit profile effectively. After all, debt is a tool that, when utilised correctly, can improve your life and open doors for you in future financial endeavours.

What personal loans can be used for

The personal loans category includes a variety of products, from payday loans to secured long-term personal loans. Whether you need emergency cash or a deposit for a venue, the only limits to the usefulness of these loans are your imagination and budget.

Here are a few popular examples of what you can do:

• Home renovations
• A family holiday at the coast
• Replacing outdated appliances
• Updating your wardrobe or furniture
• Covering the cost of moving
• Medical procedures your medical aid doesn’t cover

3 products typically found under the personal loans umbrella

Whether you’re planning a wedding or looking for ways to squash debt, personal loans can be moulded to fit your specifications. The trick to finding the most affordable option is balancing the amount you need with the most convenient repayment term.

What short-term loans have to offer

Any loan with a repayment period of between 1 and 12 months is considered a short-term loan. Generally, these products give you access to between R1,000 and R15,000, but this may vary depending on the credit provider.

These loans are often a great way to improve or build up your credit score in a few quick payments. The NCR caps the interest a lender can add on top of the repo rate to 6% for first-time borrowers. For any secondary short-term loans taken out within the same year, the cap is 3%.

Because of the limited term, the interest on this type of loan is calculated monthly. This means you can save on both interest and fees by choosing the briefest loan term you can comfortably afford.

Key benefits of short-term loans

• The quick and easy application process
• Faster turnaround times
• You don’t need to secure the loan
• Competitive interest rates based on your credit score

The inns and outs of long-term loans

When advertising personal loans, lenders are often referring to long-term loans. One of the defining features of this product is that it offers you access to between R25,000 and R350,000. The other feature that makes these loans stand out is that they offer terms of between 1 and 7 years.

While having a longer term makes repayments more affordable, there is an art to adjusting it. The interest on long-term loans is calculated annually. So If you let it drag on too long, you risk paying more than the loan is worth in fees.

Many long-term loans don’t require you to present your property, vehicle, or savings to a credit provider as collateral. Exceptions to this rule are known as secured loans. The benefits to securing your loan are access to lower interest rates, higher loan amounts, and longer terms than you’d receive with the unsecured option.

On the other hand, if you fail to pay off this loan, the lender can sell your assets to recoup their losses. A lender may insist on securing the loan if you have a low credit score, whether due to being a first-time borrower or having a bad history with debt.

Key Benefits of Long-term loans

• Flexible amounts and terms tailored to your budget
• The option of fixed or variable interest rates
• Lower rates spread over longer terms
• The choice to secure the loan

Creating breathing room with debt consolidation loans

With the alarming rise in inflation, many South Africans are on the hunt for ways to cut down on spending to free up room in their budgets. Consolidation loans are one of the most effective ways to clear up a variety of unsecured debts.

This product is fundamentally a long-term loan that allows you to exchange multiple monthly instalments with a single, more affordable one. By contacting your credit providers, you can get a settlement quote that includes any early settlement fees and determine what you’ll need to borrow.

You can borrow up to R350,000 for up to 72 months, depending on your situation and chosen lender. During the application process, you’ll be given a choice to receive a lump sum payment that you can use to pay the debts yourself. Alternatively, lenders may offer to pay your creditors on your behalf.

The interest attached to debt consolidation loans can be relatively low, but this depends heavily on your credit score. If you have a low score, it’s best to examine and compare loan offers carefully to be sure this is the most affordable option for you.

Key benefits of debt consolidation loans

• Extended loan terms and competitive interest rates
• One easy payment deducted from your account
• You’ll pay less in bank charges, interest, and other fees
• The chance to rehabilitate your credit score

Considerations for choosing the credit provider that’s right for you

It’s now easier than ever to find and apply for a personal loan online. And whether you prefer traditional banks or alternative lenders, you’ll be spoiled for choice. But knowing the differences between the classes of lenders can help you discover the service provider that suits your needs.

Banks like Absa, FNB, and Nedbank offer the stability that comes with a company that’s had years to develop their products and work on service delivery. As an account holder at any institution, you’ll have access to simplified application processes and pre-approved credit products based on your banking profile.

The benefits of choosing a traditional lender

• Higher loan amount
• Longer loan terms
• Lower interest rates and fees
• Wide range of products and services
• Expert advice and guidance

If you’re a first-time borrower having trouble getting loan approval, alternative lenders like Finchoice, Bayport, or RCS are a great place to start. Because they aren’t bound by the same bulky processes as traditional FSPs, they can narrow their focus and base approval on affordability.

The benefits of choosing an alternative lender

• The simplified, automated application process
• More relaxed criteria
• Products tailored to your financial situation
• Affordability based approval
• Approved loans are paid out within minutes

Where loan comparison companies fit in

Finding the right loan is a lot like grocery shopping. You need to compare not only the costs but the quality and benefits each brand offers. However, filling out multiple applications can be time-consuming and may negatively influence your credit score.

This is where brokers like Hippo, Compareloans, and Myloans can make a world of difference. Once you’ve applied online, they find lenders that match your specifications and help you compare the loan offers you receive. While most brokers perform this service for free, it’s always best to find out if there are any membership fees involved before creating a profile.

A quick look at the fees and interest that make up your instalments

At times finding an affordable personal loan can seem overwhelming. With hundreds of fantastic deals at your fingertips, it’s advisable to consider the costs involved carefully. The NCR strictly regulates all fees associated with any loan over R1,000 to keep things fair.

The three fees in a nutshell

The service fee is a fixed monthly rate charged for the administration of your account. The NCR prescribed maximum is R60.

Initiation fees are applicable on any loan over R1,000. This fee consists of a once-off R165 charge and 10% of the loan amount capped at R1,500. Depending on the loan agreement, the latter can be paid upfront, divided and spread over the loan period, or paid off separately.

The interest rate is a percentage of the amount borrowed calculated annually and spread across the term of your loan.

For example, if the interest offered is 27.25% on R10,000 with a term of 2 years. You’ll be charged R2,725 per year and a total of R5,450 in interest by the end of the loan agreement.

The NCR has set the maximum percentage rate a credit provider can apply to your loan. This figure is derived from the repo rate, as provided by the South African Reserve Bank, which is the basis of all credit agreements in the country. So if the repo rate is 7% and the maximum prescribed interest rate on personal loans is 21%, a lender can apply anything between 8% and 29% to your loan.

Some lenders will offer you the choice between a fixed or variable interest rate on long-term loans. The advantage of fixed rates is the stability and the comfort of knowing your monthly instalments will stay the same until the end of your loan term.

While the variable option means that your repayments will increase if the repo rate rises, it also allows you to take advantage of lower rates if it falls. When considering these features, carefully read through the terms and conditions to make sure there are no expensive surprises later.

What lenders take into account when setting interest rates

• Whether or not you’re a first-time borrower
• Your credit score and history
• The loan type, amount, and term

When comparing loan offerings from multiple lenders, the trick is always paying attention to the APR. Lenders calculate the Annual Percentage rate by including all fees, rates and taxes charged over 12 months.

How your credit score works

Credit scores are a points system ranging between 0 and 999 based on your relationship with debt. Every time you apply for store credit, pay a loan instalment, or a debit order goes off your account, it’s recorded in your credit history by registered credit bureaus and used to adjust your score.

Credit providers use this three-digit number to determine how risky it is to lend to you. A score of 650 and higher is considered good to excellent and will be rewarded with lower interest rates. Needless to say, if your rating is lower than 618, it’ll be more difficult to get loan approval, and if you do, the interest rates will be maximised.

The major flaw of this system is that people who’ve never taken out any form of credit also have a zero rating and will have to build up a positive score from scratch. While alternative lenders are usually more than willing to help, it can take between 3 to 6 months to improve your score enough to be considered for cellphone contracts, home loans, or vehicle finance.

Ways to improve your credit score

1. Pay your bills on time every month
2. Try to keep credit applications spread out and to a minimum
3. Add a little extra to the minimum instalments
4. Keep store accounts to a minimum and close them when you’ve paid them off
5. Stay well below your credit limits
6. Regularly check your credit report for inaccuracies and resolve them

What to expect from the application process

The application process may vary slightly from one lender to another. This depends mainly on how strict their lending requirements are. Whether you’re applying to a bank or alternative lender, you'll need to meet the following criteria to qualify for any form of credit.

• You must be 18 or older
• Be permanently employed and earning over R5,000 pm
• Have a bank account registered in your name
• And be a resident South African Citizen

During the application process, you’ll be required to agree to a credit check. This allows lenders to access your credit profile with your ID number and use your score to determine the interest applicable to your loan.

You’ll also be asked to provide a detailed breakdown of your monthly income and expenses. This is known as an affordability assessment, and lenders are required by law to make sure that you can afford the payments on the loan you’re applying for before offering you a credit agreement.

Having your documentation on hand helps speed things up

• A copy of your ID greenback or card
• 3 most recent payslips
• Banks statements for the last 3 months
• Proof of address in the form of a rental agreement or utility bill