Understand how personal loans work
Before applying for any form of credit, it’s important to understand the product and how it works, its benefits and your obligations.
THERE are many reasons people take out personal loans, including dealing with unexpected expenses, home renovation, education or starting a business, but it is important to understand how these loans work.
Neven Narayanasamy, at specialist loans provider, DirectAxis, says consumers are not always fully informed about how the product works and what their responsibilities are if a loan is approved.
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He said an informed decision on taking out a loan can be made once a borrower has understood its conditions.
He describes a personal loan as a type of credit where a lump sum is provided to borrowers. He says the borrowed amount, plus interest, must be repaid in monthly instalments over an agreed-upon period, typically ranging from 24 to 72 months.
“In South Africa, personal loans are normally unsecured. This makes them different from vehicle or home loans, where there is something of value, such as a house or a car, that provides the lender with some security.”
“Whatever your reason for applying for a personal loan, understanding the commitment you are making will enable you to make an informed financial decision.”
He explains that the lender uses the borrower’s credit score to determine whether they qualify for the loan and to check their risk profile. The better the credit score, the lower the risk for the credit provider.
The National Credit Act (NCA) requires that loan providers do some checks and puts the responsibility on them to ensure a borrower can afford the loan based on the information provided.
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This includes proof of identity in the form of a clear copy of a South African identity document, proof of residence, proof of income, a copy of their latest payslip (if employed) and a bank statement. For those who are self-employed, it must be at least the last three months’ worth of bank statements.
Narayanasamy says it is important to understand that while the NCA puts the onus on the credit provider to determine loan affordability, it is the borrower’s responsibility to provide accurate information and answer any questions honestly.
“Although you may really need the loan, it’s not in your best interests to exaggerate your income or conceal information. These safeguards are in place to protect you, and if you can’t afford the loan, you shouldn’t be taking it, no matter what the circumstances are,” says Narayanasamy .
He said that used responsibly, personal loans can be a useful way to deal with life’s emergencies, such as to further education or to finance a home-improvement project that adds value to a property.
He further stated that they can even be used to free up some cash by combining a number of qualifying debt repayments into a single monthly payment at a fixed interest rate – a process called consolidation.
“Whatever your reason for applying for a personal loan, understanding the commitment you are making will enable you to make an informed financial decision,” concludes Narayanasamy.
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