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What you need to know about personal loans

11 February 2014
2 minute read

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 record

Bear 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 rate

As 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 around

Find 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 policy

When 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 terms

Find 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 repayments

Work 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!

Frequently asked questions

A personal loan is an unsecured loan that you can use for various purposes, such as consolidating debt, funding home improvements, or covering unexpected expenses. Unlike secured loans, personal loans do not require collateral.

Your credit record plays a significant role in determining the interest rate you'll receive on a personal loan. Maintaining a good credit record can help you negotiate for lower interest rates and better loan terms.

According to the National Credit Act (NCA), the maximum interest rate on credit agreements entered after June 1, 2007, is regulated. For personal loans, it is calculated using the formula (Repo Rate x 2.2) + 20%, which currently amounts to 32.1% per year.

Yes, it's essential to shop around and compare personal loan offers from different financial institutions. Your own bank may offer competitive rates based on your history, but exploring other options can help you find the best deal.

To increase your chances of approval, be honest about your expenses and income during the application process. Creditors are now required to conduct affordability assessments, so providing accurate information is crucial.

When considering payment terms, ask about different scenarios and options. Longer loan terms result in higher interest payments. Check if the repayment amount fluctuates with interest rates or if you can secure a fixed repayment figure. Also, inquire about penalties for early loan settlement.

Apart from the interest rate, be sure to check for any additional charges such as annual fees. Understanding the total costs associated with the loan will help you make an informed borrowing decision.

Yes, personal loan interest rates are often negotiable. With a good credit record and a bit of negotiation, you may be able to secure a lower interest rate than initially offered.

Yes, personal loans are generally versatile and can be used for various purposes, such as funding home improvements, consolidating debt, covering medical expenses, or financing a vacation.

While personal loans can be useful in certain situations, they should be approached with caution. Borrowers should carefully assess their financial situation and have a solid plan for repayment before taking on any form of credit. Responsible borrowing is key to managing debt effectively.

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