PERSONAL LOANS

How does a personal loan work exactly?

In a nutshell: you’ll borrow the money from a lender – either a traditional bank or a smaller loan agency – and pay it back in monthly instalments over a set period of time with added interest.

The interest depends on the amount of money that you’re borrowing and the timeframe in which you’re paying it back. It’s important to note that both the amount of interest and the repayment time will impact the overall cost of the loan. A lower monthly instalment may seem cheaper, but given the longer loan term this could actually end up costing you more money in interest.

What are the different types of personal loans?

Personal loans are typically ‘unsecured’, meaning there’s no collateral to back up the loan (for example, a home loan has the house as collateral). A personal loan is backed purely by the good credit standing of the borrower (that would be you). Some lenders offer the option of a ‘secured loan’ where the borrower can put up an asset as collateral. This type of loan can result in better rates when compared to unsecured loans.

Am I eligible for a personal loan?

There are a number of factors that lenders look at when assessing whether you’re eligible for a personal loan. These include:

Age.South Africans between the age of 18 and 60 years old are eligible for a personal loan. There are certain limitations in place for individuals over the age of 60 years old

Employment status.Earning a regular income improves your chance of qualifying for a personal loan. Lenders are also more likely to offer loans to professionals working in private, government and multinational companies because of greater job stability.

Work experience.Some lenders require you to have a minimum of two years’ work experience, as well as a minimum of six months in your current position.

Minimum monthly income.Different lenders have different minimum income requirements to qualify for a loan. The amount ranges between R1 000 and R5 000.

I think I’m eligible for a personal loan. Now what?

If you tick the above requirements, you’re likely a strong candidate for a personal loan. The next step is to do the sums and work out what repayments you can afford. Look at your monthly budget to get an idea of what repayments you can make every month without putting yourself under financial strain.

Once you have your numbers worked out, it’s time to approach your financial institution or, better yet, compare quotes from lenders on the BetterCompare panel. (It’s free!)

Every personal loan is assessed on an individual basis. The amount that you qualify for and the repayment terms are based on two key factors:

1. Your credit score. This is based on your financial history: your past and current debt status and your track record with managing repayments.

2. Your current financial status and affordability. How much do you earn every month? What are your current expenses? How much disposable income do you have?

What interest rate lite cover?

The interest rate for personal loans is personalised based on your credit score and risk profile.

The maximum interest you can be charged on a personal loan, as governed by the National Credit Act, is calculated as the repo rate + 21%

Let’s say the repo rate is 4.75%. That means that the maximum interest on a personal loan is calculated as 4.75% + 21% = 25.75%. Your personalised interest rate could, however, be much less depending on your risk profile and credit score.

The maximum credit-card interest is calculated as the repo rate + 14%. In our example, that would equal 18.75%. While this figure is lower than the maximum personal-loan interest rates, multiple credit-card repayments will quickly add up to more than one personal loan interest rate – which is why a personal loan can be used to pay off multiple credit-card debts.

While most personal loans have fixed interest rates – that is, an interest rate that stays the same throughout the loan period – some loans have floating interest rates. These interest rates fluctuate over the duration of the loan, and can end up costing you a lot more over time.

What do I need to apply for a loan?

You are able to apply for a personal loan through the internet banking of your financial institution. If you’re applying for a loan through a new financial institution, you’ll need supporting documents. Requirements will differ between lenders, but you’ll likely need:

• A valid South African ID
• Proof of residence (not older than three months)
• Your most recent payslips (three months if you earn a monthly salary or six months if you’re self-employed)