What to consider before getting a loan in South Africa
Accessing credit can be incredibly beneficial for many South Africans, but consumers must ensure that they do their homework.
Although credit can help start a business, renovate a home or further one’s studies, the cost of credit continues to increase amid 15-year high interest rates.
“Credit is an agreement to borrow money or buy goods or services with the promise to pay for it later, with interest,” said Pearl Cele from FNB.
“Interest, on the other hand, is twofold: it is the money that you can earn when you put your money into an interest-bearing savings or investment account, or it is the money that you pay for using credit (for borrowing money).”
On top of the interest, there may be other fees, such as admin, service or initiation, which are known as cost of credit/cost of borrowing.
Cele gave some advice on different forms of credit available to alleviate the financial pressures:
Loans
Loans are when someone borrows from a lender or a financial institution such as a bank, with one paying back the money with interest. They can either be short- or long-term.
Short-term loans, such as personal loans, are generally for smaller amounts and have to be paid back within a short time frame.
Long-term loans are usually for larger amounts for more expensive items, such as a 20-year home loan.
Credit accounts/ instalments
These see retail stores allowing one to access services or goods on credit or “account,” and pay for them in instalments over a specified period of time.
If you are usually given a credit limit for how much you can buy, you make repayments in monthly installments.
Another example of credit accounts is hire purchase/lay-by (instalment sale agreement). These see the shop allowing one to take something, use it immediately, and pay later or pay for it in installments.
This can be used for buying items, including furniture, appliances or cellphones.
Financial institutions also use terms such as revolving credit, allowing one to borrow a certain amount of money to a certain limit and repay it over time, usually on a month-to-month basis.
One can borrow, pay, and borrow again as long as they stay within the credit limit and make timely payments, with interest only charged on the amount borrowed.
Revolving credit includes credit cards, revolving loans and store accounts.
However, revolving credit is often more expensive (higher interest rate) than long-term loans but can be easier to qualify for.
Secured and unsecured credit
Secured credit means that a lender holds or accepts one’s assets as collateral in exchange for giving the loan.
The person borrowing has to allow the lender to use one of their assets or sign that the asset can be used as security. Examples of secured credit include home loans and vehicle loans.
In the event that the loan is not paid back, the lender has the right to take possession of the asset to recover their loss due to non-payment.
Unsecured credit means that the lender does not hold a person’s assets in exchange for giving a loan.
These loans are based on other factors, such as credit records, to see if one has repaid loans.
They may charge slightly higher interest compared to secured lending, as no asset has been pledged or signed as security.
Examples of unsecured credit include credit cards, personal loans and other short-term loans.
“While there are many types of credit available to alleviate the financial pressures in these tough economic times, we encourage consumers to equip themselves with the necessary information and to always get a quote before committing to any form of credit,” said Cele.
“We also urge consumers to not borrow more than they need and overly extend themselves but to borrow responsibly.”
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