Wondering how to compare loans in South Africa? You may have come to the decision that you need to take out a loan. Find out more with RCS.
You may have come to the decision that you need to take out a loan. How do you begin this process and how do you compare which personal loan structure will work best for you? Read more on how to assess your situation and your needs.
The terms you should know before comparing loans
Before you begin comparing loans and deciding which lender to go with, familiarize yourself with these terms as they are what makes each loan different.
Interest rate
This is the amount the lender will charge against assets borrowed, in this case, money. It is the cost of debt to you and the rate of return for the lender.
Annual Percentage Rate
The interest rate is usually noted on an annual basis, as the annual percentage rate (APR). Most loans use an APR, as it does not include compounding. This allows you to directly compare rates from other lenders although does include other fees or additional costs.
Loan repayment
Depending on how much you can afford, your monthly repayments pay your lender back the money you borrowed along with interest. This installment amount can be negotiated with your lender or a financial advisor to ensure that you do not fall behind on repayments and incur debt.
Loan term
The loan repayment period or loan term is dependent on the amount borrowed and your ability to pay back. Be sure to not exceed this term when making your payments. You can pay your loan off in full before your term is completed; contact your lender for a recalculation of what you owe.
Credit history
Your credit history is determined by your behaviour with credit cards and if you have been consistently paying them off. It is also affected by the outcomes of any previous loans you have taken out. Your credit score should generally be higher than 500 to boost your chances of a successful application.
Risk
Risk is determined by your credit history/score and informs lenders on how probable they will receive the money borrowed back. If you are considered low risk, you will most likely receive a lower interest rate. Which is key when applying for a loan.
Initiation fees
This fee is paid when you take out your loan and is a once-off expense. Depending on your lender and loan structure, this initiation fee can range from anywhere up to a thousand rand. You can pay the fee in installments on top of your loan repayments or as a lump sum upfront.
Late-payment fee
If you exceed the loan term, your lender will charge a late-payment fee, which varies from lender to lender according to the amount and how late the payments are.
How to compare loans?
When considering taking out a loan, it is important to compare loans that would best suit your situation or financial circumstance. By choosing the right variables you can avoid certain situations in the future, so make notes of all the important things. Follows are certain factors that you should compare your potential loans against.
1. Prequalification
This process allows you to preview the potential structure of a loan with a lender. Lenders are also able to determine your risk or creditworthiness through a minor credit check. If the lender grants your pre-qualification, you’ll find out information about the loan you could receive including rates. Although it does not guarantee a loan, it is a good way to compare loans.
2. Monthly repayments
Compare how much you would have to pay per month for different loan options and if you would be able to afford it. Take into account the reason you are needing the loan, along with how long your loan term will be.
3. How long is the loan term?
The length of the loan term is dependent on the amount that you will be paying every month. Different types of loans have shorter or longer loan terms, for example; a student loan is most likely lower installments over a longer loan term, to minimise the pressure on your student income.
4. What are the additional costs
Loans include extra fees as discussed before; find out what fees are included in your loan repayments or what the initiation fee would be from different lenders. These could be the deciding factor showing how much money you would actually owe in the long-term.
5. APR
Ideally, you are aiming for loans with the lowest APR, meaning the lowest total cost to borrow money over the loan term.
6. Fixed vs variable interest
A fixed-rate allows for better planning for monthly repayments, while a variable rate will increase or decrease your repayment amount. Choose a variable-rate if your budget has enough flexibility to handle possible higher repayment amounts.
7. Loan calculators
There are many online loan calculators that consider how much money you would like to take out, for how long you would like to pay it off for how much per month. Before applying for a loan, do a loan calculation to create a benchmark for yourself when comparing loans.
The steps after your loan application
Once you have compared loans and submitted an application for your loan of choice, lenders conduct a thorough review of your application and creditworthiness.
How long will this take?
This process varies from lender to lender and can range from a few minutes to a few weeks. Contact your lender to find out about their process and when you can expect an answer.
What happens if your loan application is denied?
Lenders may reject a loan application because of certain factors; your credit score or history, your debt-to-income ratio, or lack of sufficient income. The lender should explain why your application was denied which can help you assess what you need to amend before applying again. Reevaluate your financial profile to guarantee approval next time you need a loan.
The process of taking a loan out can be a difficult and complicated one. For a positive result, assess your financial situation and your need for a loan to help you determine which loan structure or type would be best suited to you. Visit our Ultimate Loan Guide for more information.
