It is no secret that times are tough, and consumers are feeling the pinch as they become increasingly reliant on credit to service their basic needs. In South Africa, access to credit plays a big and vital role in advancing financial inclusion. That is why it’s important for anyone applying for a Personal Loan to have a basic understanding of how to best set themselves up to qualify, explained Emma Mer, CEO of FNB Personal Loans.
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“A Personal Loan is a great product to use to finance home renovations, vehicle related purchases, education and life events such as a wedding or the birth of a baby. Before a loan is issued to an applicant the bank conducts a thorough background check on the borrower. The assessment process looks at, among other things, the applicant’s credit record, income and expenses, and level of affordability,” added Mer.
According to her, it is therefore important to be cognisant of the following when taking out a Personal Loan:
1. Be clear on the purpose of the loan and the loan amount
“Before approaching a bank to apply for a Personal Loan you should have a clear idea of what you need it for. When you know what you are borrowing for, you are most likely to apply for an amount that matches the expense, and in that way you don’t over extend yourself. It also means that you do not fall into the trap of taking up credit constantly for day to day expenses and cash flow management,” Mer added.
2. Don’t skip payments
Often because of financial circumstances, borrowers find themselves unable to make payments certain months. “But when you skip a payment not only does this have an impact on your credit profile, it puts you under the strain of having to pay more than your monthly instalment to catch up. This could impact your ability to obtain additional credit products in future. You also run the risk of having to pay more in interest and fees to service the debt,” remarked Mer.
3. Re-evaluate expenses
This may come easier to some than others but according to Mer there is serious value in re-evaluating your expenses.
“Know what you are spending your money on, and if you see that you may possibly be spending too much on entertainment, for example, try to cut back and dedicate that money towards paying the loan,” Mer advised.
4. Make sure that you can afford to pay the instalments
The repayment term of the loan significantly influences the monthly repayment amount.
Mer gave the working example of; if you take out a R5, 000 loan and choose a repayment term of 48 months (4 years) your instalment will be lower when compared to a repayment term of 24 months (2 years) for the same amount.
“Always ensure that you have some degree of certainty that you will be able to honour the loan amount owed until the end of the term and that your income will be stable. The above will not only help you continue to gain access to credit but it may also benefit you in terms of the cost of credit,” she stated.
“When determining the interest that will be charged, one of the things the lender will look at is your credit history. At FNB, your Personal Loan interest rate is personalised and if you exercise the necessary discipline in managing your credit record, you are likely to get a better interest rate,” said Mer.
Consumers should also note that a personal loan is unsecured and the bank does not require any collateral; therefore interest rates are structured differently in comparison to secured loans like a Home Loan for example.
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