A complete guide to personal loans

Applying for a personal loan? A great guide to getting the best loan for you

Personal loans are larger than short-term loans and are usually paid back in monthly instalments that include a portion of the principal, and an interest charge. The repayment period on a personal loan can vary, but it is often between 12 months and 6 years. If you’re thinking about applying for a personal loan, this article is for you. Find out what loan options are available and what to look for from your personal loan lender.

What types of personal loans are there?

Unsecured Personal Loans – Unsecured personal loans in South Africa are 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. They 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.

Secured Personal Loan – this 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.

What can I use a personal loan for?

There is a range of basic eligibility criteria that most lenders look for in an applicant for a personal loan:

  • Being 18 years or older
  • Having a South African ID or passport to prove your identity
  • Earning an income and financial situation that will ensure you can repay the loan, including associated interest costs
personal loans

Tips to finding the best personal loans

Know your credit rating

Your credit rating has a big influence on being approved for a loan and the interest rate you’ll receive. There are five main categories of credit score influencers but a common cause for a poor credit score is a bad history of repaying debt. Having a good credit rating will usually mean you are eligible for a cheaper rate of borrowing, so knowing your credit score will provide an idea of what your loan will cost.

You can check your credit rating online with one of the main credit agencies; Transunion, Experian and Compuscan. When you check your credit rating, take some time to review the information they have on file for you. Incorrect credit accounts or personal information can mean your credit rating is not accurate and this may affect the cost of borrowing. Contact the credit agency directly if you spot an issue.

If your credit score is too low, you could take steps to improve it before applying for your loan. An improved score will increase your chances of being approved.

Don’t just go to the bank

Your bank seems like the most obvious place to apply for personal loans and, in the past, that may have been the best choice. However, the recent advances to lending technology have led to online lenders launching with smaller overheads and more sophisticated decision tools that can offer faster approval times and better rates.

Term length is important

The term length is the amount of time needed to repay the loan. The ideal term length can only be decided by you and should be carefully thought through before applying.

For example, a R10 000 loan over 2 years has a term length of 2 years. A shorter term length will mean each repayment is higher but the overall cost of borrowing is less as you are not paying interest for as long. A longer term length will mean smaller repayment amounts but a higher overall cost of borrowing.

Before applying for a loan you should work out how much you can pay back each month. A good balance between re-paying enough but not stretching yourself on a monthly basis is recommended.

personal loans application

How do I apply for a personal loan?

South Africans who wish to take out a personal loan can apply via a range of channels. Some lenders offer online applications, phone applications, postal applications, and also in-person applications.

The documents and information required during the lending process can differ slightly from lender to lender. Borrowers are usually first required to state the loan size and repayment term, whether the personal loan will be secured or unsecured, and if you would prefer a fixed or variable rate of interest. They will then need to supply a range of supporting documentation, such as proof of identification, banking information, and details about their financial situation.

Once everything is submitted, it can take several days for the lender to assess your application, and come back to you with a decision, or to request further documentation. Different lenders will also transfer your funds (if approved) within different time frames. Some can take as little as several hours whilst others may take a few days.

What documents will I need to provide?

Every lender has a slightly different application process, including the documents that are needed to apply for a personal loan. Some of the more common documents include:

  • Proof of identity, such as a passport or South African ID
  • Proof of income, such as payslips
  • 90 days of bank statements
  • Information about any debts, assets, savings, expenses, or other proof of your financial situation

Can I repay a personal loan back early?

Most lenders will allow you to repay personal loans early, but sometimes there is a fee charged for doing so. This is more common if you’re being charged a fixed rate of interest.

What should I look out for when comparing personal loans?

It always a good idea to compare the loan options available to you to make sure you are getting the best deal. Friendly Finance can help compare personal loans from a range of online lenders in one window. Things to consider include:

Interest Rates

The interest rate you are offered will depend on your personal circumstances. For example, if you have a low credit score the interest could be higher. To get an accurate interest rate you will need to apply for a loan. We recommend you do not apply to too many lenders at once as this may negatively impact your credit score. There are two types of interest rates available –

Fixed interest rates stay the same for the life of the loan, meaning you will always know how much you owe each month. However, you may have to pay a fee if you want to repay your loan early on a fixed interest rate. There is also the possibility that you will miss out on lower interest costs if the variable rates drop during your loan term, and you are held to a higher fixed rate.

Variable rates can fluctuate during the lifetime of your loan, meaning you can’t always budget your repayments exactly. If rates drop during the loan term, you may benefit from lower interests costs. However, they may also rise, meaning you will have to pay more. There is often a lower or no cost for early repayment of a personal loan with a variable rate of interest.

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. Ensure you review all fees and charges when calculating the total cost of borrowing.

Early Repayment Options

You may want to repay your personal loan early, so you should check whether this will trigger an early repayment fee.

What if I can’t repay the loan?

If you can’t repay your personal loan, the best course of action is to let your lender know as soon as possible. They may have a process in place that will help you to repay your loan at smaller, more affordable increments, over a longer period. The sooner you can contact your lender in this type of situation, the better. Ignoring the issue and simply not paying may result in several late and default fees, as well as interest payments building up.

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