Many people don’t read their loan agreements. They just sign on the dotted line without realising that they could be signing their lives away. It’s important to review your loan agreement before and after taking out your loan to avoid future setbacks.
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.
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1. Loan amount
This is the amount you borrow from the credit provider. According to Maharaj, you must make sure you only borrow the amount that you need in order to ensure you are not overextending yourself.
2. Instalment payable
This refers to how often you have agreed to make repayments – weekly, monthly, or other. This can be aligned with how often you receive your wages or salary.
3. Service fees and initiation fees
These are fees regulated by the National Credit Act (NCA) and credit providers are not allowed to charge you more than what is prescribed.
To save on fees, consolidate your loans with multiple credit providers (where you’ll be paying multiple service fees per month) into one convenient loan (where you’ll pay only one service fee per month), Maharaj advises.
This is the repayment amount due which includes the loan amount, interest, fees, and credit insurance. Make sure you understand this amount and make sure that there are sufficient funds available in your account to make your loan repayment, says Maharaj.
She says failure to pay your instalment on time negatively affects your credit profile and may affect your chance of getting a loan in future.
A tip is to ensure that your debit order date is aligned with your salary date to make sure that there are sufficient funds available for the loan repayment to be made, says Maharaj.
This amount includes the premiums or costs associated with credit life insurance. Take note of what you’re covered for under your credit life insurance policy so that in the event of an unforeseen event, you could claim from your credit life insurance to cover your loan repayment, she says.
It’s important to also look at the term and interest rate when looking at the instalment amount, she adds.
5. Number of instalments
This is the number of repayments a customer will make over the term of the loan.
To reduce your number of instalments, try and pay in extra funds into your loan. This will also decrease your total cost of credit and help you save on interest charges. It also allows you to pay off your loan quicker. Alternatively, choose a shorter term to pay off your loan.
6. Interest rate
The National Credit Regulator governs the maximum interest rates that a credit provider can charge you. Credit providers offer customers a personalised interest rate based on your credit profile.
Make sure you know what your interest rate is, understand whether this is personalised or not and whether the quoted interest rate is a monthly or annual interest rate, says Maharaj.
7. Total cost of credit
This refers to the total of all instalments, including the loan amount, interest, fees, and credit life insurance over the term of the loan.
To decrease the total cost of credit, pay in extra funds to save on interest charges and pay off your loan quicker. There are zero penalties for settling your loan earlier. It’s also important to check your interest rate and term when looking at this amount.
8. Credit cost multiple
This number refers to the number of times that you will repay the loan amount granted over the loan term. The lower the credit cost multiple, the better for you. Remember this is influenced by term, interest rates and fees.
You can lower your credit cost multiple by paying in extra into your loan, choosing to pay off your loan over a shorter term and choosing a credit provider that offers you a preferential rate.
Not reading your loan agreement can have serious consequences. It can lead to over-indebtedness and a tarnished credit profile.
If you find yourself falling behind with your loan repayments, fill in this form and a debt counsellor will contact you for assistance.