Personal loans are often unsecured loans that can be used for a wide range of purposes. Generally, you can do whatever you want with the money, but some lenders will place restrictions on what you can do with it. They are typically more difficult to obtain than credit cards, and they frequently have their own set of rules.
Because personal loans can be used for almost anything, there isn’t a single reason why people would seek them out. Personal loans are frequently utilized for large purchases or other expenses that cannot be met using a credit card.
Common reasons for taking Personal Loans are as follows:
Unexpected expense: Expenses such as substantial home repairs or the need to replace expensive company equipment, may be too much for your credit card, necessitating the use of a personal loan to cover the charges. Medical expenditures are another unplanned expense that may necessitate the use of a personal loan.
Significant life events: You may wish to pay for a major life event, such as a wedding, but you may not have the financial means to do so. A personal loan can be used to pay expenses that your funds do not cover. Funerals and relocation to a new area are two more big events that may necessitate the utilization of a personal loan.
Consolidation of debts: The money might be used to repay credit cards or other outstanding financial obligations. You’ll just have to make one monthly payment, and the interest rate on your loan may be lower than the average interest rate on your other loans.
Education: A personal loan may provide a lower interest rate than a governmental student loan, or your income may be too high to qualify for one. You can also pay off your school loans using a personal loan. Personal loans, on the other hand, do not offer the same tax benefits as government authorized student loans.
Build your credit score: If you don’t have a good credit score, you may have difficulty obtaining credit, such as vehicle or home loans. Taking out a personal loan can help you build a credit profile that will benefit you in the long run if you decide to take out a home loan. When you consistently pay your loan on time, you are essentially giving lenders an idea of how you will manage their personal loans, which gives them confidence to lend you money.
Start a business: One of the most common reasons for taking out a personal loan is to start a business. Raising capital for a business can be time-consuming and difficult; the simplest option is to take out a personal loan. Investing a personal loan in a business can help you start at a higher financial point and do more things like purchase equipment, cover advertising costs, and so on, but you are personally liable for that personal loan, not your business.
Types of Personal Loans
General Personal Loans
These are standard personal loans which don’t have any restrictions on use, which means you can use for any financial obligations you may have. Whether you choose to pay off for home renovations, use it to go on a holiday trip overseas, purchase a new car, start a business the choice is entirely up to you. Banks often offer personal loans of up to R350 000 with payback durations of up to 84 months. Personal loan providers include Capitec, ABSA, FNB, Standard Bank, African Bank, and Nedbank, to name a few.
These personal loans are only intended for the purchase of a motor vehicle and can be used to purchase a new car, motorcycle, or recreational vehicle such as a caravan or trailer. Vehicle loans can be used to purchase a vehicle from a dealership or through a private sale. However, with these personal loans, the vehicle will be in the name of the lender until you have completed repayment, at which point the lender will transfer ownership to your name. Vehicle loans are available from banks such as Nedbank, Standard Bank, ABSA, and FNB.
Debt Consolidation Loans
If you do have other loans that you are struggling to pay, a debt consolidation loan can be used to consolidate everything into a single payment, making it easier to manage and repay. A debt consolidation loan is generally an unsecured personal loan in various instances. If you can pay less interest, you’ll save money and get out of debt sooner. A debt consolidation loan offers the additional benefit of being able to be used to pay off credit cards, which can improve your credit use score.
Benefits of Personal Loans
01. Most require no collateral.
The majority of personal loans are unsecured, which means you do not have to put up any collateral when you apply. If you default, the lender will not be able to take a portion of your property as payment. The lack of equal-value collateral is one of the reasons personal loans are more difficult to get.
Personal loan lenders, on the other hand, can take additional debt recovery methods even if they cannot instantly seize your home, car, or other assets. Late payments may result in a credit bureau report, the hiring of a collection agency, or the filing of a lawsuit against you.
02. Amounts that are fixed
Personal loans are available in amounts ranging from R1,000 to R350,000, depending on the lender, your income, previous debts, and credit score. The more money you can borrow, the higher your credit score and income.
Unlike a revolving credit card debt, you cannot draw on the loan repeatedly. Loan payments reduce the debt, but they do not make additional credit available for you to borrow. The account is closed once you have paid off the debt. You’d have to reapply if you wanted to borrow again.
03. Fees and Interest
The interest rate for a personal loan is typically set, which means it will not fluctuate throughout the loan’s term. Some personal loans, on the other hand, have variable interest rates that change on a regular basis. A variable interest rate has the downside of allowing your payments to fluctuate as your rate changes, making budgeting for your loan installments difficult.
Your credit score determines loan interest rates. Your credit score improves as your interest rate decreases. Lenders will charge you late fees in addition to interest if you miss a payment. Most lenders in South Africa impose interest rates ranging from 7 to 24.75 percent on average.
04. Repayment Terms
The personal loan will be payable in a set number of months—usually 12, 24, 36, 48, or 60 months. Longer repayment terms reduce monthly loan payments, but you will pay more in interest than if you had a shorter term. The duration of your payback time may also influence your interest rate. When repayment periods are shorter, interest rates are often cheaper.
If you have an open loan, you may find it difficult to obtain new loans or credit cards, and longer repayment terms may limit your future credit options. Because many personal loans have penalties for paying off the amount early, it’s best to select the lowest payback period possible.
How to Make an Application
A personal loan from a bank or lender with whom you already have an established relationship may be easier to obtain. The bank will most likely want to know what you intend to accomplish with the money and may be able to provide you with a better loan if you tell them.
Select your loans with caution, just like you would any other loan, and only borrow what you can afford to return. Take the time to calculate your monthly payments so you know they will fit into your budget. Compare interest rates before deciding on a loan. If you are offered money at a high interest rate, you may wish to borrow less or give your credit score some time to improve.
Personal Loan Application Requirements
Most credit companies that offer personal loans need applicants to be over the age of 18 and to be permanently employed, with proof of income such as their most recent three months pay slip.
Lenders will conduct a credit check and assess your loan affordability in accordance with the National Credit Regulator’s requirements.
Choosing the Most Appropriate Loan Rates and Terms
Personal loans are offered from a range of lenders, with varying terms and conditions. Banks and lenders frequently provide competitive rates, but some internet lenders, particularly for those with great credit, offer even better terms. Online lenders may be more forgiving of bad credit, which may be both good and harmful because it can lead to scams.
Personal Loan Scams to Avoid
Keep a watch out for loan scammers, especially if you’re seeking for a lender who will accept you despite your bad credit. Avoid any lender who guarantees approval without first confirming your credit or who requires you to pay money to secure the loan, particularly via wire transfer or prepaid card.