As the year kicks in, you may still be recovering from a financial hangover and feeling a little cash-strapped. Or maybe you can’t wait six months to pave your driveway and the idea of a personal loan is becoming more tempting? Stop. Before you rush off to the nearest bank or micro lender, use the following checklist to make sure you get the best personal loan, on the best possible terms:
Credit recordBear in mind that because a personal loan is unsecured, you will end up paying a higher interest rate than you would, for example, on your home loan where your property is the security.
The good news is that personal loan rates are negotiable and you can reduce the interest rate that the loan provider is likely to grant you by maintaining a good credit record.
Interest rateAs per the National Credit Act (NCA), the maximum interest rate that you can be charged on any credit agreement entered into after June 1, 2007, is regulated. The maximum interest rates for different credit agreements are calculated using the repo rate, set by the South African Reserve Bank. The repo rate is currently 5.5%. The formula prescribed in the NCA regulations for the maximum interest rate on personal loans is (RR x 2.2) + 20% or (5.5 x 2.2) + 20%, which works out to 32.1% a year.
Shop aroundFind out what loans and interest rates you qualify for at different financial institutions. You may be offered a more attractive interest rate at your own bank, based on your history. In addition to interest rates make sure you compare other charges as well, such as annual fees.
Honesty is the best policyWhen you apply for a personal loan, think past the Rands that will be landing in your bank account and be a responsible borrower. All credit applications now require creditors such as the banks to carry out an affordability assessment before granting you credit. You can play your part by being honest about your expenses and income. Although it may seem tempting to fudge the figures so that you can get the money, you will end up regretting it if you can no longer afford to pay your debt later down the line. Remember, a bank cannot be accused of reckless lending if you deliberately give them false information regarding your income and expenses.
Payment termsFind out what your options are when it comes to payment terms and don’t be shy to ask credit providers for several different scenarios. The longer the term, the more interest you will pay. Check if your repayment will escalate in line with interest rates or if you can obtain a fixed repayment figure. Also check if there are any penalties or settlement fees payable should you choose to settle the loan early.
Total repaymentsWork out how much you will actually be repaying your provider, including interest and annual fees.
If you have to resort to a personal loan, be a savvy borrower and use this checklist to stay on the straight and narrow. Remember that any form of credit should be approached with extreme care!