A personal loan is usually to help finance a small business, a home renovation, consolidate your debt or pay for a wedding or vacation.
Personal loans can be anything from R250 to R230 000.
1. Strict requirements
Not everyone can qualify for a personal loan, because of the different features of how it works (which will be explained further from point number 2). You have to go through a stricter qualification process with a lot more requirements.
Banks have additional requirements because every loan is assessed according to your individual situation and credit history, but the overall basic requirements are as follows:
You must be a South African citizen and have an ID.
You must be of legal age. Usually people aged between 18 – 65 can apply for a personal loan.
You must be financially disciplined to make the payments every month.
You must have a credit history of your previous credits or debts and how you paid it off.
You must have a good credit score.
You must earn a certain amount of money each month (they also look at your annual income).
You need to show your employment history. Some companies require that you have to be at least employed for 3 months at the same employer.
Only individuals can apply for a personal loan.
Low risk customers are more likely to obtain a personal loan.
What is a credit score?
According to Investopedia, it is “a statistically derived numeric expression of a person's creditworthiness that is used by lenders to access the likelihood that a person will repay his or her debts. It is a number between 300 and 850 - the higher the number, the more creditworthy the person is deemed to be.”
2. A personal loan is unsecured.
An unsecured loan means that you don’t have to put up an asset as collateral. It also means you don’t need any assets to obtain the loan. Usually with a secured loan you put up an asset so whenever you can’t pay the monthly payments any more the lenders can repossess or sell that asset to make up for your debt. But with an unsecured loan (personal loan) you are not required to put up an asset which means the lender is taking a bigger risk.
There are things the lender can do whenever you can’t make the monthly payments any more. They can take the law into their own hands by reporting your late payments to the credit bureaus, hiring a collection agency or filing a lawsuit against you.
3. Everything is fixed!
This means your monthly payment, your interest rates and the period within you have to pay off the loan is fixed. No matter how the inflation changes your amount and period will always stay the same. When you enter the contract you get a fixed interest rate (worked out on your credit ranking) and it stays the same throughout your payments.
Everything depends on your credit ranking.
Before the bank or lender grants you the personal loan they first check if your credit ranking is satisfactory. Your credit ranking or credit score is calculated according to what you can afford to pay every month and is measured according to your credit history. Your credit history is your previous credit or debt and how you handled it.
Some banks usually use a risk-based pricing to determine the final price the customer is likely to pay, taking the paycheck and credit history into consideration.
The better your credit score is the more money you can borrow.
Because you don’t put an asset up as collateral your interest rate is higher than with a secured loan. The better credit ranking, the lower fixed interest rate. Low risk customers get a prime rate of 8.05%
The fixed repayment period is usually measured in months. You get different repayment periods: 12 months, 24 months, 36, 48 and 60 months. The longer your repayment period is, the lower your monthly repayment will be – but you will pay more interest.
4. Repayment penalties
Everyone would think the faster you can pay off your loan the better for everyone. Not so! Lenders lose interest if you repay your loan early. If you repay your loan earlier than the fixed repayment period that you agreed to, you can end up paying a penalty fee.
So be sure to look which lenders offer a personal loan with no early repayment penalties.
5. Online is easier
Thesedays with more and more people becoming techno-savvy, some banks and lender companies give you the option to apply for a personal loan online. It saves time and money, because you don’t have to travel to a bank and stand for hours in a row. All you need is your ID number so that they can determine your credit information.
It is very easy: all you need to do is adjust two slides on a loan calculator. The first slide is usually the amount of money you want to borrow and the second slide the date in which you are able and willing to pay it back. Once you set the slides to what you want, the loan calculator will calculate it and give you further options to proceed.
Once they approve your application and have 100% certainty that you will be able to afford it, they will send you the required documents via email. You must fill it in and sign these documents. You can fax it back to the online lenders and once you’ve done that the process is complete.
Online lenders tend to have higher approval levels and better loan terms.
But if you decide to go the online way you must know that you will end up paying more than you have originally borrowed, because of the higher interest rate.
It is also easier to get a loan from the bank with which you are already doing business with. They already know your paycheck and credit history and all they need to know is what you will use it for.
6. Loan insurance
You can apply for a loan insurance in case of uncertain times. Loan insurance is a security measure for you that keeps you from defaulting on your monthly payments especially if you are going through some financial trouble. It can also protect your monthly payments in case of death, disability and/or retrenchment.
It is only a short term protection that can last from 12 to 24 months. It helps policy holders meet their monthly debts for up to a predetermined amount. It also helps to maintain your credit score.
Loan insurance can be very expensive and not everyone will be able to afford it. If you have a low or poor credit history, you should probably skip on this option.
7. Watch out for “hidden fees” and scams!
Remember to read the fine print. Some companies charge a lower interest rate but charge higher fees to make up for the difference. Do not step into this trap: make sure that you know the total cost of your monthly repayments (plus interest).
Know beforehand what you will be able to afford. If you take out a loan and pay it off for a longer time period it means that you will end up paying more interest. Get a loan agreement that allows pay back as fast as possible without going over your budget.
Watch out for online scams! Only apply for a personal loan from reputable, respectable companies.
8. Make sure you have all the required documents
If you want to apply for a personal loan, you must bring or have the following required documents at hand:
A South African ID document
A copy of your latest 1 month bank statement
The most recent payslips for 1 month.
Proof of residence to adhere to the Financial Intelligence Centre Act which looks at your utility bill (electricity, rates, water account or bill).
A document of your employment history.
9. You don’t have to say yes right away!
Some credit provider companies can be very overwhelming with their high-pressure sales techniques. You don’t have to say yes, because they had a great sales pitch. Make your decision based on good financial sense.
Check out other credit provider companies and compare their rates and benefits.
Remember! You have rights!
You are entitled to a pre-agreement disclosure statement and quotation in paper or electronic form. Make sure the quote discloses the following things: principal debt, interest rate, other credit costs, total cost of the proposed agreement and the payment schedule or time period you have to pay it off.
10. The Regulator that protects you
Following on point number 9, you as a consumer have rights. And to make sure that you’re rights are being met, South Africa has its own Regulator for credit.
South Africa has one of the strictest lending policies in the world. The National Credit Act (NCA) protects consumers who get into credit agreements with lenders. Part of the Regulator’s responsibilities are to set the maximum fees and credit rates that lenders can charge.
Make sure what these are and if you come across a company that wants to charge you more than what the NCA has stipulated, you can report it to the NCA.