7 Factors to consider when reading your loan agreement

By Athenkosi Sawutana

Many people don’t read their loan agreements. They simply sign on the dotted line without realising that they could be signing their financial wellbeing away.

It’s important to review your loan agreement carefully in order to avoid future setbacks. Below are some tips and considerations from Amika Maharaj, product head at FNB Loans. 

Below are some tips from Amika Maharaj, product head at FNB Loans, on what to look out for and a few considerations when reading your contract. 

Tip: Make your dreams a reality. Get a personal loan quote here

1. Loan amount

According to Maharaj, the loan amount, or the amount you borrow, should never be more than you need. Otherwise, you run the risk of overextending yourself.

2. Instalment payable

This refers to the repayment regularity agreed – weekly, monthly, or other. This can be aligned with how often you receive your wages or salary.

3. Service and initiation fees

These fees are regulated by the National Credit Act (NCA), and credit providers may not exceed the limit, Maharaj says.

To save on fees, you can consolidate your loans with multiple credit providers into one convenient loan, reducing your payments to one service fee per instalment.

4. Instalment 

This is the repayment amount, and it includes the loan amount, interest, fees, and credit life insurance (if applicable). Make sure that you understand the amount, and that it lines up with the repayment term and interest rate.

Maharaj cautions that you must ensure that you have a sufficient bank balance on the scheduled repayment date. Failure to pay your instalment on time negatively affects your credit profile and may affect your chance of getting a loan in future.

If your loan amount includes credit life insurance, ensure that you understand what it covers, and how to claim.

READ MORE: Penalties for paying off your personal loan early

5. Number of instalments

This is the number of repayments you will make over the term of the loan. To reduce it, try to pay extra funds into your loan. This will reduce the overall term, and decrease the total cost of credit, as it will help you save on interest.

Alternatively, choose a shorter term to pay off your loan.

6. Interest rate

The National Credit Regulator governs the maximum interest rate that a credit provider may charge you. Credit providers offer customers a personalised interest rate based on their credit profile.

Make sure you know what your interest rate is, understand whether it’s personalised, and whether it’s monthly or annual, says Maharaj.

7. Credit cost multiple

This refers to the number of times that you will repay the loan amount, over the term of the loan. The lower the credit cost multiple, the better for you. This figure is influenced by term, interest rates and fees.

You can lower your credit cost multiple by paying extra into your loan, choosing a shorter term, and choosing a credit life cover provider that offers you a preferential rate.

Failing to read your loan agreement can have serious consequences. It can lead to over-indebtedness and a tarnished credit profile. Be sure to read your contract carefully, bearing the above tips in mind.

If you find yourself falling behind with your loan repayments, fill in this form and a debt counsellor will contact you for assistance.

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