Are you thinking of taking out a loan, but not sure what that actually means? Well, this guide is here to help you out. We look at how loans work, the different type of loans and what you should be careful of when taking out a loan.
How do loans work?
To start off, a loan is when you borrow a sum of money from a credit provider and have to pay that money back over a period of time.
Wikus Olivier, Debt Management Expert at DebtSafe explains that because the credit provider has lent you money, they will typically charge interest and admin fees on top of what you have borrowed.
Usually there are fixed terms, as in the amount of time, in which the loans have to be paid back. Olivier says that many loans these days are pay-day loans that have to be paid back at the end of the month. Short term loans, however, have to be paid back in six months or less.
There are also unsecured loans that have a 12, 24 and 36 month repayment periods.
“Typically a vehicle finance loan will have to be repaid in a maximum period of 72 months and a home loan a maximum period of 30 months,” he says.
What different types of loans are there?
All loans or debt can be classified into two main groups, says Olivier. These are “Secured” and “Unsecured”.
“Unsecured loans are things like pay-day loans, personal loans, over draft facilities, clothing accounts and credit cards. Secured loans are things like vehicle finance loans and home loans,” he says.
The main difference comes in the interest repayments. Unsecured loans usually have a higher cost involved in the form of interest, because there is no security that the credit providers can sell if you cannot repay the loan.
However, the secured loans are less of a risk to the credit providers and typically have a lower interest charge. This is because they can simply sell the vehicle or house if you do not repay the loan as per the credit agreement, explains Olivier.
What should you be careful of when taking out a loan?
Olivier says that you must make sure that the credit provider from who you are borrowing is in fact registered with the National Credit Regulator (NCR). Only dodgy credit providers do not register with the NCR.
“Make sure that you understand all the terms and conditions in the credit agreement. Make sure that you understand the interest and fees charges,” he says.
He also says that there is a maximum that credit providers are allowed to charge in terms of the National Credit Act (NCA).
“Very important is to ensure that before taking out a loan, you understand what the instalment or monthly repayment is going to be, and that you are able to afford it each and every month. Also, there are certain practices that are illegal. Credit providers are not allowed to keep your ID book or any card as security until you repay the loan,” he says.
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