Understanding how loans work

During Covid-19 there has been an large increase in the number of people looking for a loan to tide them over. “Unfortunately we are also seeing many people who just cannot pay off their existing loans.  Many South Africans are experiencing financial hardship at the moment and we are constantly looking at ways we can ease their financial burden,” says George Roussos, Chief Operations Officer at African Bank.

Roussos says before taking out a loan it is very key you do your homework and do not get scammed by any unscrupulous credit providers.

You need to firstly, understand exactly what a personal loan is. Essentially it is money borrowed from a bank or other credit provider that you pay back as a fixed monthly loan repayment. A personal loan is an unsecured loan, which means it is not backed by collateral

Also, not everyone can take out a loan. You must be over 18 to apply for a loan and will need to produce a recent proof of income which reflects at least three salary payments (i.e. payslips) and a recent bank statement reflecting three salary deposits.

Roussos says, “If you are considering a loan, one of the first things you should do is speak to a professional.”

He offers these 6 tips that could be discussion points with your financial advisor and will make you smarter about loans:

1. Understand the true cost of the loan

The true cost of a loan takes into account the interest payable, any other charges and when the payments are due.

2. What if I miss a payment or pay in lump sums

You have to repay your loan every month to avoid being flagged as a lapsed payer or incurring interest.  You cannot pay a lump sum and then skip a couple of months as loans don’t allow for forward payment of instalments. When you pay a lump sum, it goes to settling the capital, so while it reduces the amount she owed, and therefore your monthly instalment, you still owe the instalment every month.

3. Check your credit rating and the small print

Before applying for a loan check your credit rating. This can be done annually free of charge through several bureaux or monthly through the African Bank site.

4. Ask about early repayment charges

Did you know that some lenders charge you if you pay back your loan earlier than the time frame agreed upon? It’s a good idea to check how much this charge will be before you apply for a particular loan.

5. You may save more by borrowing more

In general, the larger the loan the lower the interest rate. So, there’s a chance that you may actually save money by borrowing slightly more.

6. Don’t apply for too many loans and consider consolidation

If you have existing loans you may want to consider debt consolidation. Consolidation loans are especially helpful if you want to simplify your credit by settling other debt and turning several loan payments into one cost-effective payment.

7. I have an existing loan but I have lost my job and cannot pay my instalments

Credit Life insurance is the first option to consider. For employed people, it covers the monthly instalments of up to 12 months in the case of loss of income/retrenchment, short time and compulsory unpaid leave. It also provides cover of instalments for up to 12 months in the case of temporary disability. In the case of permanent disability and death, the outstanding balance of the credit facility is settled.

You are eligible for this provided your monthly instalments are up to date.

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