Everything You Need to Know about Loans

A loan is a sum of money borrowed from the bank to assist for certain planned or unplanned events. The borrower is required to pay back the loan, including the interest charged over a stipulated period. There are several types of loans for various financial requirements. A bank can grant a loan in the form of a secured or unsecured loan. A secure loan is usually a large sum of money that is needed to purchase a house or car and is the ideal choice for a home loan or car loan. An unsecured loan is preferential for student loans, or personal loans which usually consist of smaller amounts of money. 


Types of Loans

Banks provide various types of loans to ensure that they meet all your needs.

  • Home Loan – The bank borrows you money, and the house remains the property of the bank until the final instalment is made. Consumers are required to pay back the loan on a monthly basis, at the given interest rate and over a stipulated period, normally 20yrs. 
  • Student Loan – Students that want to further their studies at any higher education institution that require financial assistance apply for student loans. The bank provides the money for the duration of their studies and after the completion of their studies; the student needs to pay back the money. The interest rates are usually low and there are flexible repayment options.
  • Car Loan – Most banks provide car loans for both used and new cars. Consumers pay back the instalments on a monthly basis, and the vehicle belongs to the bank until the final payment is made.
  • Personal Loan – Banks provide different options when it comes to a personal loan. This is a financial solution ideal to suit all your needs. The amount of money that you can borrow depends on the chosen bank, your financial eligibility and affordability to repay the loan. 
  • Business Loan – A business loan provides you with the capital to start your business venture. The bank provides you with the money and you are required to make the repayments after an agreed period of time. The requirements vary according to each bank and whether you are a new business or have been in operation plays a major part in your loan application.


Secured Loan vs Unsecured Loan

A Secured Loan is a long-term loan, which has a guarantee attached to it. It’s the best way to obtain large amounts of money and purchase property. Assets are used as security in case of a default. Large amounts of money will not be borrowed to you without assurance, which is why you place your home or assets as leverage to guarantee that you will repay your loan on time. Secured loans consist of low interest rates and longer repayment options.   

An Unsecured Loan is a short-term loan and it has no guarantee attached to it. It is usually given on the basis of your credit record and financial position. Unsecured loans include credit cards, personal loans and student loans. Owing to the high risk of this type of loan the, the interest rate is also higher. It is imperative to consult with your chosen financial institution on the various options regarding both their secured and unsecured loans.


Criteria for Applying for a Loan

Every financial institution has different criteria for their loan applications dependent on the type of loan. There are, however, common elements. Generally, when you apply for a loan you must:

  • Be 18 years or older
  • Have a valid South African ID
  • Hold a bank account
  • Provide proof of residence
  • Present 3 - 6 months recent salary slips or bank statements
  • Provide proof of income

It is your responsibility to find out each financial institutions features and benefits and to compare them respectively. Numerous options are available, so choose the option that best suits you and your needs. 


Factors to Consider

Taking a loan is a big responsibility and you are required to pay back all the money plus interest. There are numerous factors that will affect the cost of your loan, namely:

  1. Credit Record – Your credit record will determine your loan rates. If your credit record is good and shows reliability, you will incur lower interest rates. Similarly, if your credit record is in a bad state, it will be more difficult for you to obtain a loan, and your interest rates will be higher.
  2. Loan Duration – The loan duration is another factor when deciding on the cost of your loan. The longer you choose to pay off your loan, the higher the interest rates.
  3. Type of Loan - The type of loan you decide on will also impact your interest rates, a secured loan, usually contains lower rates, compared to an unsecured loan.
  4. Inflation Rate – The inflation rate is the rate at which prices increase in the economy. This has a major impact on your interest rates.

When you take out a loan, it is imperative to know your repayment date. If you have not signed a stop order it is your responsibility to ensure that the monthly payments are made on the due date for the duration of the loan period. If you fail to repay the correct amount, there are numerous penalties you may face, including:

  • A bad credit record
  • A higher interest rate
  • Reduced chances of applying for another loan
  • An additional late payment fee


Payment Protection Insurance

To avoid the above-mentioned penalties, it is advisable to take out Payment Protection Insurance. It ensures the repayment of your loan if you die, lose your job or become disabled or ill. You can obtain Payment Protection Insurance on your home loan as well as for your credit card and personal loans. To prevent any claiming issues, ensure that you read all the terms and conditions, completely understand your policy, and are aware of all the details.   


Annual Percentage Rate

The representative Annual Percentage Rate (APR) is the charged interest rate for the whole year. The APR measures your cost of borrowing money from a specific institution, as well as any other associated costs. Institutions vary in terms of their transaction fees, interest-rate structures and late penalties, so it is useful when you need to compare different loans. Each institution includes its own APR, therefore you need to meticulously evaluate each one and choose the best option.  

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