With the rising cost of living, driven in part by increased fuel, water and electricity costs, more people will, at some stage, need to borrow money. Whether it’s to cover an unexpected expense, improve living conditions, or achieve a personal goal, loans can provide a financial lifeline.
Research by specialist loan provider Direct Axis shows that 28% of South Africans apply for personal loans to cover emergency expenses, 20% to fund home renovations, and 11% for education.
“Whatever the reason, understanding your rights and responsibilities before applying for a loan is crucial,” says Gavyn Letley, DirectAxis’ Product Head.
“The research shows that people chose personal loans over other types of credit because the application is straightforward and the approval process is quick. Nonetheless, it’s important to know what you’re getting yourself into.”
Personal loans typically range from R8,000 to R350,000 and are repaid, with interest, over an agreed period.
There are two kinds of loans, secured and unsecured. Secured loans are usually used to buy expensive assets such as a house or a car. The lender is protected because they own the asset until the loan is repaid. If it is not repaid timeously, the asset can be sold to recover what is owed.
Unsecured loans, such as personal loans that DirectAxis provides, are not linked to an asset. Instead, the applicant’s credit rating, income, and whether they can afford the loan determine whether the application will be approved and at what interest rate.
Specialist credit bureaus calculate credit scores or ratings based on a consumer’s credit and repayment record. South Africans are entitled to a free full credit report annually from any of the credit bureaus, but online tools such as Pulse allow registered users to check their credit ratings as often as they like.
The application process for unsecured loans is designed to be quick and easy, while ensuring that credit providers meet the strict conditions in the National Credit Act(NCA) before approving a loan. These requirements are in place to protect consumers by ensuring that they cannot borrow more than they can afford.
To complete the application process, applicants must provide proof of identity, residence, and income. The credit provider then follows a series of prescribed steps to approve the applications. These include, but are not limited to, confirming the credit score, income, money owed, and the amount of debt compared to what the applicant earns.
The term of the loan is the time you have to repay it. This depends on the credit provider’s terms, the amount you borrow, your financial position, and your repayment preference.
The repayment term affects both affordability and the total interest paid. Typically, longer terms lower the monthly instalments but increase the total interest, while shorter terms increase the monthly payments and reduce borrowing costs.
Letley says that before applying for a loan, consumers should consider the following:
- Affordability: Can you repay the instalments even if interest rates rise? Will you still have enough money to pay essential expenses such as housing, food and transport? Can you afford to add to the debt you are already servicing?
- Total cost of credit: Make sure you understand the total cost of the loan, not just the amount borrowed, plus the interest rate. You also need to consider initiation fees, monthly service fees and credit life insurance.
- Loan term: You will need to balance how much you can comfortably repay each month and the total cost of the loan.
- Credit provider: Ensure the lender is registered with the National Credit Regulator as a registered credit provider. Beware of lenders who ask for upfront approval fees, do not provide a written credit agreement, or who pressure you to sign immediately.
- Early repayments: Confirm whether the loan allows early settlement and whether there are any early termination fees.
“While the NCA makes the lender responsible for checking whether the applicant can afford the loan, it relies on the information that is provided. That’s why it’s important to be honest about your income and expenses. If a loan is approved because you’ve under-reported your expenses, it will add to your financial pressures. If you then can’t afford the repayments, it will negatively affect your credit score, which could limit your ability to borrow in future,” concludes Letley.