All on Loans and Credit
If you consider yourself to be financially savvy, your first reaction to an article on loans might be to hit the delete button. After all, you have your financial affairs in order and would never entertain the thought of borrowing money. However, there comes a time in most peoples’ lives when seeking financial assistance is inevitable. For example, very few of us are lucky enough to have a stash of cash hidden away for that necessary home or car purchase. And in cases like this getting your hands on some extra cash will, of course, be welcome.
The South African market has suddenly seen a growth of loan providers who promise quick and easy access to cash. Whilst this is great as it gives the customer lots of options, some of these companies are under investigation for enticing people into a ‘debt trap’ through on-going and costly repayments. To make sure you don’t become victim to such traps, we’ve put together these simple tips to understanding the world of loans and credit.
1. There is a lot of jargon out there – But it doesn’t need to put you off
Here we have simplified some of the common terms you are likely to come across:
Secured Loans Vs. Unsecured Loans
Secured loans are those that are connected to some sort of asset like your house. If you are unable to pay back the loan, the bank may decide to take hold of the asset. These loans are usually easier to obtain and they tend to have lower interest rates (as the bank is taking less risk).
Unsecured loans are not linked to a specific asset and include items such as credit card purchases.
Fixed Rate Loans Vs. Variable Rate Loans
Fixed rate loans keep the same interest rate throughout the period in which the loan is being paid back.
Variable rate loans will have a changing interest rate based on the underlying rate determined by the South African Reserve Bank. Convertible loans allow you to alternate between fixed and variable options.
Annual Percentage Rate (APR)
The cost of taking out a loan is usually described as its APR. The APR will take into account the interest rate for that loan as well as any additional payable fees.
2. Loans constitute a number of different financial instruments - Understand the basic types to decide which you require
Some of the more popular products are described below:
These are unsecured loans that usually require you to pay back a fixed amount over a fixed period. Nowadays, personal loans are readily available but most banks will take into account your credit rating when deciding on the amount you will be able to borrow.
A note on credit ratings:
Credit ratings are assigned to all of us as a way of determining how likely we are to pay back a loan based on our previous borrowing experience. You need to be mindful of building up a positive credit history as banks will use this to decide whether they should a) lend to you and b) what the cost of lending should be (typically, a poor credit history will mean that the bank will charge a higher interest rate).
These are usually small loans taken out by individuals who require a cash advancement before their wages are due. The interest rates are typically high for such loans but terms of borrowing are short.
Most car dealerships will offer you financing options for the purchase of your vehicle. There are typically lots of options available – some of which may require you to pay an initial deposit.
Although not the same as a loan, the principle is the same. Overdrafts enable you withdraw more money than you have in your account based on an interest rate agreed with your bank. These are usually used for very short-term financial needs.
3. The ‘term’ refers to the duration during which you will be making repayments - agree a term that works for you
Typically, the longer the term of the loan the smaller your monthly repayments will be. However, over the lifetime of the loan, you may find that you have paid significantly more than you borrowed as interest is charged on a monthly basis.
4. The cost of a loan might be your primary deciding factor– But consider the bigger picture
Aside from interest rates, consider the following key questions:
How efficient is the process of applying for a loan?
Depending on how urgently you require finance, you might want to compare the process each provider has for applying for a loan. There are many providers who now guarantee a 24-hour turnaround time for loan applications and give you the option of submitting your application online.
Are the terms of the loan tailor-made to your individual needs?
Before you commit to a loan agreement, you need to take into account your situation including how much money you need and how quickly you will be able to pay it back. A good loan provider will be open to discussing your specific requirements and offering a product that is suited to your situation. Many providers will also be willing to discuss any changes in your circumstances and make required changes to your repayment terms.
Does the provider penalize you for early repayment?
In some cases, you might find that you no longer require the loan and are able to pay off the borrowed amount sooner than you thought. If you anticipate this to be the case, find out if the provider will charge you a penalty for early repayment.
5. Poor credit history does not necessarily mean you cannot access a loan
You might find that your ability to obtain a loan is hindered by your past borrowing history. There are, however, some providers that offer products (known as Bad Credit Loans) for those who have a poor credit history.
You’ve got a loan…now what…
The National Credit Regulator (NCR) is responsible for managing loans and credit in South Africa. It also has a mandate to educate borrowers on the credit market and how to become credit wise. To save you the hassle, we’ve pulled out some of the most important messages put out by the NCR on managing your debts more effectively:
- Prioritise and pay your debt – Use simple budgeting techniques to account for debts and focus on first paying those debts that incur the highest interest rates
- Don’t ignore your debt – If things get tough, get in touch with your credit providers and explain your situation. Remember, credit providers would rather receive small payments from you than none at all, so negotiate lower installments.
- If you need help from an outsider, look into getting hold of a Debt Counselor.
- Avoid additional borrowing to pay off your debt
- Focus your attention on saving to avoid falling into the debt trap
Check out the full list of tips on the NCR website: http://www.ncr.org.za/newsletters/01/MAMA%20SIZA.pdf