PERSONAL LOANS

A personal loan is exactly what it sounds like: a form of credit designed to help you out financially when you need it – like when that household appliance packs up, or when your best friend decides to have a destination wedding. In a nutshell, it’s a borrowed lump sum of cash to pay for a big, unforeseen purchase. You could also potentially use a personal loan to pay off and consolidate lots of smaller debts, like store cards.

But where do you begin? Do you even qualify for a personal loan? What’s the difference between prime, repo and fixed interest rates? What if you can’t pay the borrowed money back? You asked, we’re answering. This is everything you need to know about taking out a personal loan in South Africa.

What personal loan terms do I need to know?

Before we dive into the details of everything you’ve ever wanted to know about personal loans, there are a few terms that you need to understand.

Credit: borrowing money or accessing goods without making payment up front
Lender: the person or institution that lends you the money.
Borrower: the person receiving the money (Hi! That’s you.)
Credit score: the figure that gives lenders an idea of your track record with borrowing money
Monthly instalment: the amount of money due every month to repay the loan
Interest: the amount that the lender charges you for borrowing their money
Repo rate: the rate at which the South African Reserve Bank lends money to the commercial banks
Prime rate: the rate at which banks lend money to consumers. This is typically the baseline rate you will be charged.

Where do I get a personal loan?

Personal loans are available from lenders – either a traditional bank or other smaller loan agencies.

How do I pay back the loan?

You’ll pay back the loan in monthly instalments over a set period of time, with interest. Depending on your agreement with the lender, the instalment may be taken out of your account as a debit order. Certain types of loans offer revolving credit, in which case you can borrow again what you’ve already paid back.

Do I need to tell the lender what the loan is for?

No. With other types of loans – such as car finance or home loans– the money has to be used for what it says on the box, so to speak. But a personal loan is simply a sum of money deposited into your bank account that you can use as and when you need it. (Even if it’s for that limited-edition pair of sneakers.)

What are thedifferent types of personal loans?

Loans can be secured or unsecured. A secured loan is a loan that has an asset as backup. A home loan, for example, is secured because it has the house as collateral. If you’re unable to pay back the loan, the bank will keep the property as their own asset.

With a secured loan, the bank technically owns your asset until you’ve paid them back in full. Personal loans can be secured (you put something up as collateral, like your car) but are typically unsecured. Since the lender is taking a greater risk in lending you the money, the interest rate may be higher on an unsecured loan.

Why do lenders charge interest on personal loans?

Quite simply, this is how they make their money. The lender charges a slightly higher interest rate than what their lender charges them. The difference between these two interests is their profit.

How do the lenders calculate interest?

The interest you qualify for is personalised based on a variety of factors, including the amount of money you borrow, the timeframe in which you need to pay it back, your credit score and your current financial status.

Do all lenders offerthe same personal loan interest rates?

Different lenders offer different interest rates, which is why it’s recommended that you compare quotes to ensure you’re getting the best deal. (We can help you with this! Visit the BetterCompare personal loan page for a range of free quotes.)

Who can take out a personal loan?

In South Africa, if you’re between 18 and 60 years old you are eligible to apply for a personal loan. However, there are a number of additional factors that affect whether you actually qualify for a personal loan.

What factors do lenders look at to see if I qualify for a personal loan?

Lenders will look at your credit score and current financial status when considering your personal loan application. This includes your employment status, work experience and minimum monthly income.

Having a regular income from a stable job will improve your chances of qualifying for a personal loan. Some lenders may also require you to have a minimum of two years’ work experience. A seemingly predictable financial future makes lenders more comfortable, as it’s more likely you’ll be able to pay them back.

What disqualifies me from getting a personal loan?

A low credit score, high debt-to-income ratio, unstable employment, low income versus the loan amount and failure to produce the requested documents are all factors that would disqualify you from getting a personal loan.

Credit score?What’s that?

Your credit score is a number that tells the lender about your – here’s a fun word – creditworthiness. It’s based on your financial history and takes into account your past and current debt status as well as your track record with managing repayments. A score of 650 and above is considered good.

Yikes! How do I find out what my credit score is?

Everyone has access to a free credit report once a year. Contact a credit bureau such as ClearScore ZA, TransUnion or Experian for quick access to your credit score.

With a secured loan, the bank technically owns your asset until you’ve paid them back in full. Personal loans can be secured (you put something up as collateral, like your car) but are typically unsecured. Since the lender is taking a greater risk in lending you the money, the interest rate may be higher on an unsecured loan.

I have a bad credit score. Now what?

It’s time to rebuild your credit history! Start by paying off all outstanding bills, store cards, credit cards and other loans. This will take time and sacrifice, but it’s worth it to be free of debt and to enjoy a good credit score. Then have patience: it can take up to six months for these positive changes to have an impact on your credit score.

But I need the money now! I don’t have time to wait until my credit score improves. Is there another way to get a personal loan?

If your credit score is below average and the traditional lenders are denying your personal loan application, you can apply for what is called a ‘bad credit personal loan’ . These are offered by non-traditional lenders. Tread carefully though – they typically have higher interest rates and associated fees.

What is the minimum income I need to have to qualify for a personal loan?

Different lenders will have different minimum income requirements, but it typically ranges between R1 000 and R5 000.

Prime vs repo interest rates: please explain this to me in a nutshell?

When you borrow money from a lender, they may, in turn, need to borrow money from the South African Reserve Bank. The Reserve Bank charges the commercial lender fixed interest on the loan. That number is what’s known as the repo rate.

The bank then lends the borrower (you) that money. Basically, it’s a loan on top of a loan. The bank needs to charge you interest in order to pay back the interest they owe and make a profit. This fixed fee is called the prime lending rate (or sometimes the prime interest rate). It’s the default interest rate that consumers are charged and it is also determined by the Reserve Bank. The banks are allowed to adjust this percentage based on your credit history.

‘Interest linked to prime’ vs fixed interest rates. Huh?

Prime and repo rates fluctuate over time based on the performance of the South African economy. This will affect any loans linked to these interest rates – somewhat unpredictably!

If your financial institution needs to borrow money from the Reserve Bank in order to give you your loan, the interest they charge you will need to be linked to the repo rate. When the repo rate goes up or down, the prime interest rate changes by the same margin, which means your repayment amounts will also fluctuate.

If the lender does not need to borrow the money from the Reserve Bank, they will be able to offer you a fixed interest rate for the duration of the loan period. That means your interest rate will remain the same until you’re all paid up, regardless of what’s happening in the world.

What is the maximum interest rate I can be charged?

The National Credit Act says that the maximum interest you can be charged on a personal loan is calculated as the repo rate + 21%. Let’s say the repo rate is 4.75%. The maximum interest on a personal loan will be 4.75% + 21% = 25.75%. Your personalised interest rate could, however, be much less depending on your risk profile and credit score.

How long do I have to pay back a personal loan?

The personal loan repayment period is highly variable and entirely dependent on your ability to pay it back. The repayment period typically ranges between six months and six years.

The faster you pay back a loan, the less it costs you in interest. Let’s say you borrow R10 000 at the maximum current interest rate of 25.75% as per our example above. Let’s also say that you

choose to pay it back over six months. You’ll have to repay just over R2 000 a month and the loan will cost you just under R3 000 in interest. If you choose to pay it back over two years, you’ll pay around R700 a month only – but the interest will cost you around R6 500 in total!

Do I have to apply for a loan with my own bank?

No, you do not need to bank with a specific financial institution in order to apply for a personal loan from them.

What happens if I can't pay back my personal loan?

Try your best to avoid defaulting on personal loan repayments. Not only will this have a significant negative impact on your credit score, but you could end up facing legal action.

If you’re struggling to pay your instalments, read your loan agreement terms and conditions. Some agreements include credit life insurance which can help cover payments when life throws you unforeseen curveballs. (This was a very common insurance claim during the early hard Covid-19 lockdowns.) If you become ill or pass away, this insurance would also cover the remaining amount in full, so the debt doesn’t fall to your dependents to pay.

Reach out to the financial institution that provided the loan. They may be able to assist by changing the terms so that you pay less each month, but for a longer period of time.

Worst-case scenario? If you’re absolutely unable to pay, you’ll go through the collection process and may eventually end up in court. This could end in a garnishee order against your salary (with the court’s approval), which means your income will go straight to the collector.

What fees are included in a personal loan?

When you first take out a personal loan, you’ll pay the lender an initiation fee. This once-off fee is dependent on the amount, the type of loan and the credit provider, and it can easily exceed R1 000. It can either be paid up front or be added to the total loan amount and paid off with your monthly instalments.

You’ll also be required to pay a small monthly service fee on your loan. If you opt to take credit life insurance, this will be another monthly fee.

Read the small print carefully to look for potential hidden fees. These could be cancellation fees, prepayment penalties or late-payment charges.

I’m flush! What happens if I pay back the loan before the loan term ends?

The sooner you pay back the loan, the less you’ll pay in interest. Great news! But before you transfer a big lump sum to your lender, read the small print (again). Lenders sometimes bake ‘prepayment’ fees into the contract, which means you’ll be charged for clearing the debt before the loan term is ended.

Do the maths: is the prepayment fee more or less than the interest you’ll save? Even if you end up paying a little more now, it could be worth it, since getting rid of your existing debt means you’re improving your monthly financial position in the long run and improving your credit score.