Credit options explained
If this is the first time you have found yourself in need of money, you may not be aware of the what is available to you. We have outlined some of the options below to give you an introduction to consumer credit market.
An overdraft is a deficit in a bank account that is caused by withdrawing more money than currently in the account. If you have an active checking account with a bank you can apply for an overdraft. It will allow you to cover shortfalls or monthly cash flow when you need it. Typically, you will need to be an existing member of a bank, show you are employed with the minimum monthly income and you must have a valid ID. The interest rate on your overdraft will be unique to you, based on your credit risk profile. Interest is usually charged on a daily basis, so an overdraft may not be the ideal option if you cannot repay the amount in a timely manner.
A credit card is a card that is issued by a financial provider giving you, the holder, ability to purchase items on credit, usually at the point of sale. Credit card holders can draw on a set credit limit that is approved by the card issuer. Cardholders typically need to repay the credit card purchases within 30 days to avoid interest and/or additional fees. Some credit cards can provide added insurance with purchases (especially online) and may offer additional benefits like air mile points. Credit cards typically come with an initiation fee and a monthly service fee.
Short Term Loan
Short term, or payday loans, are an unsecured line of credit usually up to R4,000 that are borrowed over 1-31 days. To apply for a payday loan you will need to be a minimum of 18 years old, in full-time employment, a permanent citizen of South Africa and have an active bank account. There are a variety of alternative providers online that offer payday loans to South African consumers that will often get the funds to you the same day if you are approved before 3 pm. Lenders will usually charge an initiation fee, a service fee and a daily interest on all payday loans. A short term loan is a very convenient option if you are in need of money to bridge the gap until your next payday. You will likely incur high charges if you can’t repay the loan on the agreed upon date, so be confident you can afford the line of credit before applying.
Asset Based Loan
An asset-based loan is where the lender takes collateral (assets) as security against the line of credit. There are a number of asset-based lenders in South Africa that accept various items as ‘security’. The most common items accepted are vehicles, boats, jewellery, artwork and antiques. The lender will appraise your asset and a percentage (up to 80%) of the asset value. The asset is given to the lender during the term of the loan and is returned once the loan is fully repaid. You can be approved for an asset-based loan in under 48 hours. An asset-based loan doesn’t usually require a credit check, so maybe a more viable option to receive a larger loan amount if you have a poor credit rating.
A personal loan is an unsecured, larger line of credit that is repaid over a longer period of time (1-5 years). South African lenders will typically offer personal loans up to R150,000 with an online application and approval process. Personal loans have a similar set of minimum criteria for short-term loans, except that you are likely to need a much better credit rating. Personal loans usually come with a monthly service fee and a fixed or variable interest rate, quoted per annum. Some providers will allow early repayments without additional costs. Consumers opt for this loan when looking to make a large purchase or consolidate historical debts into one repayment.
This breakdown should help you decide on an option that best suits your personal situation and needs. It is important to be confident in making repayments, regardless of the loan option you decide to take out. Inability to make repayments will lead to additional fees that could result in a cycle of debt you will find difficult to escape.