South Africans are struggling and many people are turning to loans to cover their everyday living expenses. Though any loan can go horribly wrong and end up being the reason you need to go under debt review, all loans should not be lumped into one category.
Secured and unsecured debt, are the two major types of debt in SA
Personal loans, credit cards, retail store accounts and overdrafts are all examples of unsecured debt, as you don’t need any security or collateral (house, car) to apply for this type of loan.
A home loan is an example of secured debt. If you have a home loan with a bank and you don’t repay the loan as per the credit agreement, then the bank has the right to repossess the asset (house).
Different types of loans
Conventional personal loan: You can either apply for a shorter or longer repayment term.
Usually, the larger the amount, the longer the term. Interest rates on a personal loan can vary from 3% to 30%.
Try and get a fixed interest rate on your personal loan so that your repayment remains the same and you know exactly what to budget for.
Payday loans: These loans are normally short-term loans that are taken and repaid on your next payday.
The full repayment term is normally 28 days. These loans are expensive as interest rates are high.
Consolidation loans: This is simply one loan amount taken to cover multiple debts.
Essentially, you have one big debt, paying off smaller debts.
You have to do your calculations very carefully here, especially since these loans also come with quite large initiation, admin fees and long terms of repayment.
You have to ask yourself if it is worth putting an existing balance on which you might only have six more months to pay, under a consolidation loan with a 60-month term.
Vehicle finance: Vehicle finance is seen as unsecured debt, with a longer term that normally ranges from 12–72 months.
The longer the term, the lower the installment – but the more the final interest paid. You also have the option of a “balloon payment” where the installments are less, but you have to pay a final lump sum at the end of the term.
This method could generally end up costing you more.
Home loans: Most home loans require a deposit. The best time to apply for a home loan is when the interest rates are low, but it is important to remember that interest rates do fluctuate. You can either opt for a fixed interest rate or make enough provision in your budget for when interest rates rise.
Student loans: A student loan covers educational costs from one year to the next.
It includes text books and accommodation.
You will normally have to pay back the monthly interest on the loan while you are studying and start paying back the loan in its entirety once you get a job.
Tips when taking out a loan:
Credit report: You are entitled to one free credit report from the credit bureaus once a year.
There is practically no use in applying for a loan if you have a credit report filled with judgements and bad payment history.
However, if you have no judgments you might be pleasantly surprised by your credit report. Some bad payee information gets removed after a certain period of time, so it’s always good to just get your credit report and take it from there.
What to do when you can’t repay your loan
- Contact NDA, South Africa’s leading debt counsellors – even before you miss a payment, as we will be able to arrange for lower interest rates, extended terms and one consolidated lower monthly repayment on your loan(s)
- Do not wait until debt collectors start harassing you or creditors start taking legal action
There is no shame in defaulting on your loan repayments. Everyone is struggling. You are not alone, and NDA is here to lighten your burden of debt.