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Things to consider before taking a personal loan

 In Articles, Loans, Personal Loans

Personal loans can be found online from banks and non-bank institutions. The majority of lenders offer unsecured personal loans, allowing you to borrow between R1,000 to R50,000 (with some lenders offering higher amounts) with repayment terms up to 60 months. A personal loan can be a great way to help fund larger purchases or pay for home improvements. Below are things to consider before applying for a personal loan.

1. You may not be offered the rate you see advertised.

Loan providers a risk-based algorithm to decide rates. Your personal situation and credit score will factor into the risk-based calculations the lending provider will undergo to decide your unique lending rate. The advertised rates are known as ‘typical rates’ that is a range that the majority of consumers will fall into. If you are a high-risk lending consumer (with a low credit score) the lender may offer you a higher rate than advertised. The best rates are offered to consumers with excellent credit scores.

2. Longer terms mean more interest paid.

Your monthly repayments will be dependent on both the loan amount requested and the loan term. If the loan amount remains the same, shortening the loan term will increase your monthly payments, whilst increasing the loan term will decrease the monthly payment. You should select a loan term that will provide you with manageable monthly payments.

Keep in mind that you want to pay the loan off as quickly as possible so that you do not pay more interest. Every month you owe money, you pay more interest. Take a look at the below example:

You borrow  R20,000 at 10% APR:

a) If you borrow over 6 months;

Monthly payment = R3,426

Total repayment = R20,561

Cost of Credit = R561

b) If you borrow over 18 months;

Monthly payment = R1,197

Total repayment = R21,549

Cost of Credit = R 1,549

As you can see, your cost of credit increases with the loan term and this doesn’t take into account other fees (such as a monthly service fee) that will also accrue over time.

3. Is a credit card a better option?

For short-term borrowing, your needs may be more suited to a credit card. You can search for a credit card provider that offers a 12-month 0% interest free period. This will enable you to extend a line of credit and repay the full amount within 12 months, without incurring an interest cost. If you opt for this route, make sure to repay the full amount before the 12 month period is over as you are likely to incur a high-interest rate.

4. Early Repayment can cost.

Some personal lenders will charge you a penalty fee for early repayments, as they are missing out on revenue from the interest you would have paid. Lenders will outline early repayment fees either on their website, or within the loan agreement.

5. Look for all costs.

It is unlikely that the interest rate will be the only cost of borrowing. Most lenders also charge an initiation fee for creating your borrowing account and a monthly service fee for managing the account ongoing. There may also be other fees and charges hidden within the loan agreement. Be sure to carefully read your loan agreement to understand the total cost of borrowing.

6. Payments could vary from month to month.

Lenders tend to offer either a fixed or variable interest rate on a personal loan. Agreeing to an interest rate will mean your interest will remain constant throughout the term of the loan and your repayments will be the same month on month. A variable interest rate can mean better initial rates but the lender can increase the interest rate at anytime during the term of the loan to accommodate market fluctuations. This can result in higher monthly repayments if the interest rate increases.

Always remember to borrow within your means to avoid falling into a cycle of debt that may occur if you are unable to meet the repayments due.