By Anja van den Berg
Most people will require a loan at some point in their lives – whether it’s to invest in a home, buy an engagement ring or open a small business. But be warned: not all loans are created equal.
Vera Nagtegaal, the executive head of Hippo.co.za, says there are two main types of loans available to consumers: secured loans and unsecured loans.
Although interest rates on both loans are capped under the National Credit Act (NCA), the difference lies in what interest rates may be charged on each.
The maximum interest rate on unsecured loans can be up to 34,85%, while for secured loans it can be up to 19,85%. These rates take into consideration your credit rating.
“A client with a good credit score is someone who makes their repayments on time, does not have large outstanding debts, and has not been negatively listed,” says Nagtegaal.
She explains that “the maximum interest rates are caps on how much interest can be charged on different types of loans. However, the bank has the discretion to charge you a lower interest rate if they deem you to have a good credit history.”
Knowing your loan options will help you make the right decision. Take some time to understand and compare loan options, their benefits and different loan features. African Bank provides these pointers towards understanding the different types of loans to choose the one best suited to your needs:
- Personal loans let you select either a short or long repayment period. A short-term personal loan is a great option if you need a small cash injection. These loans, however, usually have a higher interest rate. A long-term loan is for larger amounts and allows for payments over several years. This means smaller instalments and a lower interest rate.
- A fixed-rate loan assures you that the interest rate will not fluctuate during the lifetime of the loan. This option will give you peace of mind knowing that your monthly repayments won’t change.
- Payday loans are short-term loans that usually require repayment within 28 days. These loans are usually very expensive and if you miss a payment, you will be charged a higher fee. This is an example of bad debt.
- Debt consolidation loans are a simple way of paying off multiple debts, combined into one loan. Your bank will settle your debt and then you will repay your bank, meaning you will make only one monthly payment to the bank, often at a better interest rate.
- Business loans are similar to personal loans, except that the loan is taken out in the name of a business. A wide variety of business loans are available in South Africa, so do your research in terms of payback terms and interest rates. This is a good option for the early days of a new business.
- Vehicle finance is the best option when it comes to buying a car. You can choose between a fixed interest rate or a linked interest rate, which is linked to the country’s current interest rate. With a linked interest rate, you can expect your car repayments to fluctuate from time to time. Finance terms usually range between 12 and 72 months. The longer you finance the vehicle for, the lower your instalments will be. There is also the option of a “balloon payment”, where you pay a final lump sum once you get to the end of your loan term. This allows for lower monthly instalments but could cost you more in the long run – it’s wise to do your research first.
- Home loans can be tailor-made for your requirements and there are several options available from home loan providers. Some of these include the following:
- Fixed-rate home loan: Similar to the fixed-rate loan mentioned above, a fixed rate home loan protects the borrower from increasing interest rates.
- 100% home loan: Popular for first-time home buyers, this loan does not require a deposit.
- Variable home loan: When the interest rate fluctuates, so does the repayment.
- Capped-rate home loan: This type of home loan is often difficult to qualify for – it offers the benefits of a variable home loan rate and protects you from increasing interest rates with a predetermined “cap” rate.
- Step-down home loans: Available to individuals close to retirement age, this type of home loan sees the interest rate declining every year or even every six months.
Loans can play an important role in growing a person’s asset base and access to different types of goods and services. But, it is incredibly important that consumers understand how these are structured, what the terms and interest rates are, as well as the importance of maintaining a good credit history.
East Coast Radio: https://www.ecr.co.za/lifestyle/family/expert-advice-dealing-loans/
African Bank: https://www.africanbank.co.za/en/home/blog-landing/different-loans-help-you-get-ahead/