The Ultimate Loan Guide in South Africa
11 AUGUST 2023
At some point in our lives, there are times when we need to take out a loan for extra financial support. Here is a loan guide to help you navigate the process.
WHAT IS LENDING?
Lending (or financing) represents the act of borrowing money from one person to another. Money is lent to the borrower with the prerequisite that the borrower will repay the lender. The loan given creates debt the borrower needs to settle. Lending can also involve properties or other assets.
There are a few different types of lenders, depending on the type of loan you need. Direct lenders are banks, credit unions and other financial institutions. Banks are the most common lender and have the larger variety of types of loans.
TYPES OF LOANS
Borrowing money is often needed for many cases, from paying for tertiary education to financing a new business. Different types of loans would be best suited for certain needs, and it’s important to know what your options are.
Buying a home is a big financial investment and doing so with the correct tools and knowledge is key. Home loans or mortgages are loans provided by home loan lenders and are taken out against the house you are purchasing as security if you are unable to pay the repayments.
Before buying your first home and taking a loan out, make sure that your financial status is capable of handling it; pay out outstanding debts and calculate all your expenses. Most lenders will assist with the process of preparing to take a bond out, with calculations and consultations.
Personal loans are offered by all banks and lenders and are the most common type taken out to pay for large one-off purchases or to cover an expense that your income alone cannot do. They typically have lower interest rates than credit cards, which makes them useful for most quick expenses.
Personal loans are unsecured, meaning that you as the borrower does not need to put up any assets in case you cannot pay the loan back, in the case of a car or home mortgages. The amount paid out can be up to R200 000 and repayment periods last from between two to five years.
Business loans are used to finance business expenses, from starting capital to buying stock. In order to take out a loan, your business needs to fulfil certain requirements to qualify. Make sure that you are aware of these requirements as they can change from lender to lender.
There are secured loan options taken out against your business assets or unsecured options that don’t need collateral. Fixed or variable interest rates are available, depending on what you are comfortable with paying, along with repayment periods from between 6 months to 25 years.
Car loans or car financing is used for supplementing the purchase of a car. There are different options of car loans, with different interest rates or repayment periods. When taking out a hire purchase agreement, you pay a monthly instalment to your car financier. This requires a deposit and can influence how much your instalments will be.
Two other car loan options are using personal loans to buy a car or a personal contract purchase. Personal contract purchases are similar to hire purchases; however, you do not pay the value of the car brand new, rather you pay off the value of its depreciation once the contract ends.
WHAT TO CONSIDER WHEN TAKING OUT A LOAN
Banks will review your current financial state to assess whether you are viable for a loan, this in turn can influence the amount you receive or the length of the repayment period.
The type of loan you take out is heavily dependent on your needs, for example as a student, a student loan is specifically catered to your situation, with a lower interest rate and longer repayment period. As a business owner, you might find yourself without assets to your business but still in need of a loan. This means that you will have to take a loan out that does not require you to secure it against collateral.
THE LOAN PROCESS
In order to qualify to take out a loan, there are three factors that come under review:
- Affordability: The amount you can afford to repay every month, determined by looking at your take-home income and if you already owe money elsewhere.
- Employment: The stability and period of your employment can influence the amount of credit you can qualify for.
- Credit behaviour: This is the risk that you could possibly pose to credit lenders, determined by your consistency when paying instalments.
Prepare yourself for a loan application by making sure you cover the 5 Cs of credit and all the basics:
- Find out what type of loan you need and approach the appropriate lender.
- Ensure that you have a good credit score, which is generally between 681 and 766.
- Research the minimum loan requirement in order to apply.
- Have the correct documentation on hand; ID number, income and bank statements, utility papers, employment details, and your current bank account information.
During the application process, lenders will perform a credit check and review the history of your credit, looking for any inconsistencies. Do not apply for loans that you only think you will get, as constant applications can have a negative impact on your credit.
3. Loan approval and transfer
Approval for a loan can depend on the lender or type of loan you are applying for. This process can take from seven days to two weeks after all factors have been reviewed. Once approved, the loan amount may be immediately transferred into your bank account, however, depending on your bank, it could take up to two business days.
On your acceptance of the loan, you agree to the stipulated terms of repayment. It is up to you to stay on top of the loan period date or if there are monthly instalments. If you fail to keep up with repayments, you could risk losing the asset your loan is secured against or accumulating debt and a lower credit score.
5. Account closure
For certain loan types, like home loans, you will need to manually “close” or settle loan accounts. This can be done through the credit lender and guidance is available to determine if this process needs to be done.
QUICK LENDING TIPS
- Set a due date to pay your loan on time
- Protect your loan with Customer Protection Insurance
- Stick to a monthly budget
- Keep receipts of all payments
- Follow our tips and create a repayment plan that’s practical and achievable.
Borrowing money need not be overly complicated but be aware of each factor surrounding your qualification and application to maximise your chances of getting an approval notification. Utilize this loan guide when planning to take a loan out and live life to the fullest, while keeping financially responsible.