As each new year begins, many people struggle to make ends meet, and take out loans and other forms of credit to help cover expenses.
While taking on credit of itself is not a bad thing, it’s important to do so responsibly.
Tip: Apply for a personal loan from a responsible lender.
Things to consider when taking out a loan
Piet van der Walt, head of Sanlam Personal Loans, says, “There are times when taking out a loan may be your only option. For instance, when emergencies arise, a loan can be a lifesaver.
“The first thing you should ask yourself when considering a loan is whether you really need whatever you are going to spend it on.”
DebtBusters, a leading debt counselling company, agrees, and notes further that any loan you take must add value and must never be used for buying groceries or luxuries.
Whatever your reason for taking on credit, an Absa spokesperson notes that the type of product you choose requires careful consideration.
“It’s important for you to fully understand the different types of credit products available to meet your needs. Do you need short-term, long-term, or recurring access to credit?
“It’s also important to know the interest rates that you are likely to pay, and to understand your financial obligations.”
Consider your income and expenses, Absa says, and see how much you can afford to comfortably repay each month.
Interest rates and fees
Van der Walt says it’s important to choose a reputable lender that offers personalised and competitive interest rates.
“Loan sharks and some micro lenders tend to ask maximum interest rates over the short term. It’s better to go to a reputable lender, who will do a comprehensive affordability assessment to ensure you don’t run the risk of defaulting,” he says.
Short-term loans are assessed on an individual basis, taking into consideration affordability and the requirements set out by the National Credit Act (NCA).
The banks use risk-based pricing to determine the final amount a customer is likely to pay. This rate is linked to the customer’s credit history and repayment record. Low-risk consumers can get a rate of prime on a personal loan.
One of the benefits of short-term loans is that they are payable on a fixed-rate basis. In other words, the interest rate for which you qualify will be fixed for the term of the loan.
Absa says, “Short term loans, as per the NCA, can be charged at a maximum of 5% per month. Unsecured credit transactions are billable at a maximum of the repo rate (RR) plus 21% per year, and unsecured credit facilities at the RR plus 14% per year.
“Longer-term loans charge lower interest rates but are paid off over longer periods. Fees are charged monthly, and this credit type is more costly in the long run.”
Settling your debt early
Paying off your debt early could save you a packet, but there are conditions attached.
According to the NCA, creditors may not penalise you for early settlement of a small or intermediate agreement. However, if you have a home loan or your debt is more than R250,000, a penalty will apply.
The NCA says, “The settlement amount may include an early settlement charge. This may not be more than three months’ interest - and it must be less if the consumer provides notice of his or her intention to settle early.
“Any notice given by the consumer will reduce the early settlement charge by the length of the notice period given,” states the NCA.
Home loans
The most cost-effective form of credit is usually a home loan. The NCA stipulates that the rate you pay on a home loan should not be more than repo rate plus 12%. Currently, this works out to roughly 15.5%. This is much lower than the interest you would pay on a credit facility or personal loan, which cost up to 17.5% and 24.5% respectively.
If you want to save on interest, shopping around will help you find the best deal.
Tips for responsible borrowing
Absa offers the following tips to help people borrow responsibly.
- Get to grips with your income and expenses, to ensure that you’re in a position to make the debt repayments.
- Make sure you understand the credit agreement fully before you sign it, and be sure to ask any questions you might have. It’s crucial that you understand your financial responsibilities.
- If you encounter any difficulties in repaying the loan, be proactive and contact the credit provider to make a payment arrangement.
- A home loan deposit can make a big difference to the interest rate charged and the amount you need to borrow. Consider the repayment term (20 or 30 years) and the financial impact that additional interest could have.
- Paying an extra 10% of your repayment every month can reduce your home loan term by five years and save you a significant amount of interest. Even a once-off additional payment can make a big difference in the long run.
- Know your credit rating. You’re entitled to one free credit check per year from the credit bureaus, and some credit platforms enable more frequent access. This will help you better understand your credit status.