Need a personal loan?

Credit bureau data shows the average new personal loan in South Africa is just about R33,000. Shows that lenders are open to extending credit to borrowers however they are remain cautious by extending much higher loan amounts to lower risk borrowers to manage the spike in non-prime originations.

Personal loan explained

A personal loan is when a person or an organization, lends you a lump sum of money for a small cost. In other words, a personal loan is money borrowed from a lender that can be used for nearly any purpose. Including paying off debt, financing a vehicle or a boat, or covering the cost of a major expense like a wedding.

For example, Thabo wishes to do some basic home renovations, but doesn’t have R30 000 saved up to do so. So, he goes and secures a short term personal loan of R30 000 from the bank at the cost of paying back the full amount plus interest over an agreed period of time. The percentage interest is the cost that the bank charges for providing Thabo with the lump sum.

Loans can be obtained from online lenders, local banks and credit unions and the funds are provided in a lump sum. Once you receive the cash, you must make payments until the debt has been fully repaid.

Need a loan? FASTA and MPOWA loans offer short-term loans. 

Before you apply for a personal loan, you should know some common loan terms, including:

• Principal — This is the amount you borrow. For example, if you apply for a personal loan of R30,000, that amount is the principal. When the lender calculates the interest they’ll charge you, they base their calculation on the principal you owe. As you continue to repay a personal loan, the principal amount decreases.

• Interest (%) — When you take out a personal loan, you agree to repay your debt with interest, which is essentially the lender’s “charge” for allowing you to use their money, and repay it over time. You’ll pay a monthly interest charge in addition to the portion of your payment that goes toward reducing the principal.

• APR — APR stands for “annual percentage rate.” When you take out any kind of loan, in addition to the interest, the lender will typically charge fees for making the loan. APR incorporates both your interest rate and any lender fees to give you a better picture of the actual cost of your loan. Comparing APRs is a good way to compare the affordability and value of different personal loans.

• Term — Is the number of months you have to repay the loan. When a lender approves your personal loan application, they’ll inform you of the interest rate and term they’re offering.

• Monthly payment — Every month during the term, you’ll owe a monthly payment to the lender. This payment will include money toward paying down the principal of the amount you owe as well as a portion of the total interest you’ll owe over the life of the loan.

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When taking out a personal loan, keep in mind the following tips:

• Review your current financial obligations to be sure you can afford the payments
• Compare loans from multiple banks to ensure you obtain the best personal loan interest rate
• Be honest when declaring your income and expenses
• Review the potentially large purchases in the future, which may be affected by the loan, such as a home purchase, wedding, car purchase, etc.

Read: Things to lookout: Personal loan

How do I get a personal loan?

If you’re looking to get a personal loan, you’ll have to complete an application and wait for approval — a process that may take anywhere from a few hours or days.

Before you submit a personal loan application, it’s important to review your credit report and your credit score. It will help you understand what lenders might see when they pull your credit report and scores.

Types of personal loans

Personal loans can be secured or unsecured. A secured personal loan is taken out against collateral as a form of your assets such as your car or home. These are often issued if your creditworthiness is not enough to ensure that you will pay back the loan, thus representing more risk for the lender. Secured loans are most likely to have higher interest rates as well.

Unsecured personal loans do not need any collateral. Maintaining a higher credit score will mean that you are responsible with your debt and repay on time, meaning less risk for the lender. These types of loans often have lower interest and are more flexible in terms of loan details.

Free Course: How to pay off your debt

How personal loans affect your credit score

Taking on a personal loan can help improve your credit rating and credit mix. Credit mix refers to the different types of credit accounts you have, including credit cards, loans, mortgages, etc. It make up 10% of your credit score.

Just like any credit, irresponsible use of a personal loan can have a negative impact on your credit score. When you apply for any type of credit, including a personal loan, lenders will do a credit check on you. This results in a hard inquiry on your credit report, which negatively affects your credit score.

What can I use a personal loan for?

Personal loans can be used for almost any purpose. Common uses include debt consolidation, home improvement projects, medical bills and refinancing an existing loan.

Loans can also be used for other purposes, like paying for a wedding, vacation or other large purchase.

When to use personal loans

A personal loan should help you reach your financial goals rather than contribute to a debt problem, which is why we recommend using one only when it saves you money, improves your income-generating capabilities or helps increase the value of something you own.

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For example, a home improvement project could increase the value of your home, and a loan may make sense if you don’t have a lot of equity in your home or you don’t want to use your home as collateral.

A personal loan can also be a smart way to consolidate multiple forms of debt if the loan has a lower interest rate. With this type of loan, you would use it to pay off what you owe, then make fixed monthly payments toward the personal loan.

Paying back a personal loan

Personal loans are like any other debt: You should have an understanding of how the monthly payments change your budget and a clear plan to pay off the loan.

Fix your Debt Safely with DebtSafe. DebtSafe offers safe and secure Debt Consolidation.

Read: Can debt be a good thing

Read: Debt counseling vs debt consolidation

This could mean revisiting your budget and adding in your monthly payment. keep an eye on any refinancing opportunities to take advantage of an even lower rate.

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