Every now and then most people will need some help with their finances. You may need to repair a car, renovate a room for a new baby, pay for a tertiary course or settle a medical bill.
Whatever the reason, applying for a personal loan is one way to get the money you need. As with any financial product, before you commit, it’s important to understand how it works, and what the product provider’s responsibilities and your obligations are.
Marlies Kappers, chief marketing officer at financial services provider, DirectAxis, says that like many financial terms, ‘personal loan’ is commonly used, but not always properly understood.
A personal loan is money that you borrow from a registered financial services company and which you must pay back over an agreed period, typically up to six years. These loans differ from a microloan, which the National Credit Act defines as ‘a short-term credit transaction’. Microloans are for amounts less than R8 000 and are paid back over a period of no longer than six months.
There are two kinds of personal loans: secured and unsecured. A secured loan is where you offer something to the same value as the loan, such as a house or car, as a guarantee that you will repay the money. If you don’t pay back the loan over the agreed time, then whatever you’ve offered as security can be sold to get back the money which is owed.
An unsecured loan is offered without the guarantee of security. Instead, your credit record determines whether your application will be approved and the interest you will pay. Your income, credit rating and whether you can afford the loan provide some of the information used to decide this.
Applying should be quick and easy. The National Credit Act sets out very strict conditions that loan providers must meet before they can lend you money. These requirements are in place to protect you and put the responsibility on the credit providers to carefully check that you can afford the loan, based on the information that you provide.
You’ll be asked for the following basic information when you apply:
• Proof of identity in the form of a clear copy of your South African identity document.
• Proof of residence such as a recent rates or electricity bill or similar document that confirms your residential address.
• Proof of income. If you’re employed, you can provide a copy of your latest payslip. If you’re self-employed, you will need to submit the last three months’ bank statements.
The credit provider must then follow a series of steps before it can lend you the money. These include, but aren’t limited to, confirming your credit score, income, any money you owe as well as how much debt you have compared to what you earn.
The term of the loan is the time you have to repay it. It depends on the credit provider, the amount you borrow, your financial position as well as your preference for repayment.
The longer the term, the lower the monthly repayments will be, but remember you will also be paying interest on the amount you borrowed over a longer period.
There are a few things that determine the interest rate you pay. These include the type of loan you get, who provides it and your credit rating.
Secured loans generally have lower interest rates as the credit provider is taking less risk. If the loan is unsecured, then your creditworthiness will influence the interest rate. If you have a good track record of repaying debt and a steady income, you are potentially seen as a lower risk and you could get a better interest rate.
Interest rates can be fixed or variable. Fixed rates mean the interest rate stays the same for the entire period of the loan, no matter whether the Reserve Bank changes interest rates. An advantage of a fixed rate is that you know exactly what you need to pay each month.
Variable rates mean the interest rate can go up or down, depending on whether interest rates rise or fall over the term of the loan. As there is an element of risk to you in taking a variable-rate loan, these rates are generally slightly lower than fixed rates.