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Things to consider about personal loans

 In Articles, Loans, Personal Loans

A personal loan is a lump sum of money provided to you by a credit provider that is repaid over time in monthly, fortnightly or weekly instalments.  Personal loans can range in amount and term, with the average consumer borrowing R15,000 over 12 months.  You may consider taking out a personal loan if you are in need of an immediate lump sum of cash for various reasons, including; home improvements, paying for a wedding, to consolidate your debt or paying medical emergency bills.  Before rushing into taking out a personal loan there are a few things you should know and consider.

Different types of personal loans

There is more than one type of personal loan available.  You can apply for an unsecured personal loan or a secured personal loan. An unsecured personal loan is not supported by assets, meaning the lender cannot seize your property in the event of a loan not being repaid. An unsecured personal loan can come with higher interest rates to mitigate the risk of lending to the lender.  Unsecured personal loans are also usually only available to consumers with good to excellent credit rating as your previous financial behaviour will play a more important role in the approval decision.

A secured personal loan is one where you provide assets as collateral against the loan.  The most common type of secured personal loan is a mortgage where your home is used as the asset to secure the money.  If you fail to repay the loan, the lender will seize the assets as compensation.  A secured loan may be a better option for you if you have a bad credit rating. You are more likely to be approved for a loan as the collateral reduces the risk of lending for the lender. As a general guideline, assets that can be used as collateral against the loan include; vehicles, boats, jewellery, and artwork.

Do you need insurance?

Consider whether you want to take out insurance on the loan. Some lenders will offer online protection insurance at an additional fee. The credit protection insurance will pay the loan in the event that you cannot make the repayments due to unforeseen circumstances, such as death or injury.  Some people see the protection as a waste of money, but others view it is a valuable option for protecting their family against potential debt.

What are the alternatives?

A personal can be very useful, but there may be times where it is not your best option. For example, if you plan to use a personal loan to consolidate credit card debt you need to make sure that the interest rates and fees offered by the lender do not exceed the current interest rates and fees you are paying.  If you are diligent with your repayments and are looking to consolidate credit card debt, a balance transfer credit card may be a better option.

Even if you are certain that a personal loan is the best option, make sure you shop around for the best deal. Traditional banks are not the only place you can receive funding for a personal loan. Alternative online lenders are now ever-present in the South African market and can sometimes provide a quicker approval with lower interest rates than a bank.

Don’t apply for too many loans

When shopping around be careful not to apply for too many loans. Every time you apply for a loan it is likely a credit check will be done on you. Each time a credit check is done, your overall credit rating is lowered by a few points. This means that applying for too many loans in quick succession could have a negative effect on your credit rating. Before applying, review the lender’s website for the average interest and fees charged to gauge what you may be offered.

Be careful of hidden fees

Always check for hidden fees. In addition to interest rates, lenders may apply an establishment fee. This is a one-time upfront cost for creating your loan account. The lender may also charge a monthly service fee for managing your loan account on an ongoing basis until you have fully repaid the loan. Other fees you may come across include such things as a direct debit processing fee that is incurred every time the direct debit is used to make a monthly repayment.

If you are struggling to find an outline of fees disclosed on the lender’s website you can contact the lender directly and ask. Alternatively, all fees and charges will be outlined clearly in your loan agreement so make sure you thoroughly read your agreement prior to signing.  When reviewing, also keep in mind the potential costs and charges that could be incurred due to late payments or dishonouring repayments.  Factor costs and interest rates into your personal affordability decisions and comparison of lender deals.