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How to choose the right loan for your unique needs

By Isabelle Coetzee

You may find yourself in a situation where you’d like to take out a loan. But did you know that there are different kinds of loans, and that one loan is not suitable in all instances?

We have a look at the difference between secured and unsecured loans, and we compare examples of home loans and personal loans.  

Tip: If you need a loan for general reasons, consider a personal loan.

Difference between secured and unsecured

According to Yvonne Viljoen, home finance expert at ooba Home Loans, personal loans are considered unsecured lending.

“Personal loans have no fixed asset as collateral, as opposed to, for example, a home loan which is considered secured lending because it has a fixed asset as security,” says Viljoen.

In other words, a home loan is tied to the house for which it’s being taken out. If you default on your home loan, your creditors can take possession of your house, sell it, and recoup the money they lent to you.

However, if you take out a personal loan, it’s not tied to an asset. So, if you default on your loan, your creditor won’t have an asset to sell to get their money back.

As a result, Viljoen says that the terms and conditions of personal loans are far less favourable than that of a home loan.

READ MORE: What’s the easiest way to get a loan?

Comparing home loans and personal loans

“The traditional home loan term is 20 years, whereas the traditional personal loan term is 12, 18, 24, 36, or 72 months,” says Viljoen.

“The traditional interest rate for a home loan – client and risk dependant – is below the prime rate (7%) or just above the prime rate,” she explains.

“But a personal loan tends to attract a much higher interest rate, as much as 5% above prime (12%),” she adds.

Viljoen says that a home loan also has no rand value limit, whilst a personal loan, bank dependant is limited to around R300,000.

“If you plan on doing renovations and you already have a home loan, I’d suggest extending that home loan,” says Viljoen.

“This can be done as a ‘further loan’ whereby you apply to register a second home loan on the existing home loan you already have. The interest rate is likely to be better than a personal loan and the term will be better,” she explains.  

To apply for a home loan, click here and fill out the form to see whether you’d be approved.

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