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There are times when we all need a little extra cash. Personal loans can be a lifesaver at these times and put some extra funds in your bank account. You can use personal loans to ease a financial burden or cover an unexpected expense. But loans come with responsibilities – you have to pay them back. We’ve put together a list of questions to ask yourself before you take a loan, so you know exactly how your loan works and what you need to consider before taking the loan.
1.Why am I taking a personal loan?
Have a clear reason for taking a loan. And make sure you use the loan for what it was intended. It’s important to differentiate between wants and needs. A personal loan should be taken for things that will enable and uplift you and not to cover a shortfall between your earnings and your spending.
2. What fees will I pay?
Ask if there are admin fees such as initiation fees and monthly service charges. They are usually added to your repayment amount each month and can add to the overall amount that you pay over the term of the loan. Make sure you are clear on all the fees you will pay and make sure to ask about any penalties that you may incur.
3. What is the term of the loan?
This is how long you take to pay the personal loan back and can be anything from a few months to a few years. Most personal loans have a flexible repayment period that you set up front. Taking a loan over 60 months means your repayment amounts will be lower than if you took the loan over 12 months, for example. But your overall charges may be higher because interest will be paid over more months. Generally, it is best to pay a loan off as quickly as possible, but make sure you can afford the repayment amounts before you commit to the loan term.
Top tip: Ask if you can change the term of the loan once you have signed the contract in case you run into financial difficulty and need to lower your repayment amount.
4. What is the interest rate and is it fixed or flexible?
Interest is what the loan company charges for lending you the money. Interest rates on personal loans vary and the interest on the loan is added to the loan amount you have to pay back every month.
Fixed interest rates are set for the term of the loan and won’t change. This gives you certainty so you know exactly how much your repayments will be. Variable interest rates change when the South African interest rates change. While this is a good thing if interest rates go down, if they go up it means you pay more. A variable interest rate also means you cannot budget for a set repayment amount each month as the amount may vary so you need to weigh up your options before you sign up for the loan.
5. What are my monthly repayments?
Find out what the repayments are on your loan including interest, loan amount and any fees or service charges. You can ask your loan company for a schedule of your repayments, and how much the repayment would be for your loan over different terms so you can choose an affordable repayment.
Be sure to ask if the payments are fixed – which means you pay the same amount each month, or variable - which means the amount you pay may change each month. Whenever you enter into any loan agreement you must make sure you understand all aspects of the loan so that you are well prepared to pay back the loan on time and in full.
6. What happens if I skip a repayment?
Your loan company will contact you and find out how you can make up the payment. They may also be able to extend the term to make repayments lower if you are struggling with the repayment amount. But this will most likely reflect on your credit record, which will harm your chances of future loans and of getting finance at lower interest rates, so make sure you can afford the repayments with interest. Any form of credit that you take affects your credit record, so you need to make sure that you manage the loan repayments responsibly.
7. What happens if I miss a payment because I am ill, retrenched or pass away?
You can insure loans by taking personal protection so that if something unexpected happens your outstanding loan amount will be paid. Ask your loan company and insurance company about protection for personal loans. This is often referred to as credit life insurance. Make sure you read the contract thoroughly to understand what you are covered for.
8. When and how do I get statements?
It is really important that your loan company or bank sends you a monthly statement showing how much the loan is, what the interest rate is, how much you have repaid and how much is outstanding. Personal loans are highly regulated in South Africa to make sure loan companies don’t charge too much interest or other fees, so every reputable company will send you statements. Always check your statements and take up queries with the lender quickly if something doesn’t make sense.
Final wordsPersonal loans are a great way to get some extra funds when you need them. If you use them responsibly, they can ease financial worries. Manage them well and your credit record will show that you can manage debt responsibly.
