By Nico Strydom
Sometimes debt is hardly unavoidable, but it is important to understand how the different financial products work and what your rights and responsibilities are in this regard.
A personal loan is money that you borrow from a registered financial service provider and have to pay back over an agreed period. These loans differ from a microloan, which the National Credit Act defines as a ‘short-term credit transaction,’ says Nozizwe Fakude, head of consumer insights at DirectAxis. Microloans are for amounts less than R8 000 and are paid back over a period not exceeding six months.
There are two kinds of personal loans, secured loans and unsecured loans. “A secured loan is where you offer something of the same value as the loan, such as a house or a car, as security that you will repay the money. If the loan is not paid back over the agreed period, whatever you offered as security can be sold to regain the money owed.”
An unsecured loan is not ensured with an asset. “Instead, your credit record determines whether your application will be approved and the interest you will pay. Your income, credit rating and whether you can afford the loan, are some of the information used to reach a decision in this regard.”
The National Credit Act sets strict stipulations which loan providers have to meet before money can be borrowed. These stipulations are in place to protect consumers and to place the responsibility on the credit provider to ensure precisely that the person can afford the loan, based on the information provided.
“You will be asked to provide proof of identity, residence and income. The credit provider must than follow a series of steps before money can be borrowed. These include, but aren’t limited to, the confirmation of the credit score, income, any money you owe, as well as how much debt you have in comparison to what you earn.”
Nozizwe says if the credit provider requests any additional information about whether you have other income or expenses, it is important to be honest.
“Even if you really need the money, it’s a bad idea to borrow more than you can afford. Not only will it eventually contribute to your financial stress, but it could influence your ability to borrow in the future.”
The term of the loan is the time you have to repay it. This depends on the credit provider, the amount you borrow, your financial position as well as your preferred term of repayment.
Usually the longer the term, the lower the monthly instalments will be, but remember that you will also pay interest on the amount that you borrowed over a longer period.