A loan is generally an amount of money advanced to a person (you) which needs to be repaid within a specified time period, together with interest and an administrative fee. There are various types of loans available in the market, and It is important that you understand the differences, especially as certain loans are much more expensive than others.

Various lenders may apply the term personal loans differently which is confusing. Generally, a personal loan (sometimes known as a long- term loan), is provided to a qualifying individual, and is repayable monthly during a period between 12 months and 72 months. The loan value normally does not exceed R300 000 (2019). The personal loan may be used at your discretion, for example, buying furniture, or debt consolidation.

Personal loans as addressed in this article are regulated in terms of National Credit Act (NCA), under the section referred to as Unsecured Credit Transaction. The regulation of the loan includes limiting the interest and fees charged by the lender.

Personal loans are however still expensive as the interest rate and administrative costs are high in relation to the amount borrowed. Therefore, before taking out a loan you must be sure that you really need one and that it will benefit you.

There is no one definition of personal loans applied in the market and lenders may apply the term personal loans differently. This said, two common types of personal loans are described below.

Term loan
This is the standard type of personal loan, that most lenders provide. It provides a loan which is repaid monthly over a fixed term. Once the loan is repaid the loan agreement is terminated.

Revolving loan
This loan is similar to the term loan however you can get access to your funds again when you’ve repaid a certain percentage of the loan (For example 15% of the loan is repaid) You may also get the option to increase the loan amount over time. Not all lenders offer this option however certain banks are likely to provide this type of loan.

Personal loans
Personal loans generally have longer repayment periods and lower interest rates when compared to short term loans. Personal loans are further explained in this article.

Short term loans
Short term loans are limited in terms of regulations (2019) to R8000 and must be repaid within six months. The interest rate applicable to short term loans is generally higher than the rate charged on personal loans. For more information on short term loans click here.

The personal loan amounts may differ by lender with the minimum being approximately R1000 and the maximum likely to be R300 000 (2019).

The amount loaned will also depend on the risk assessment prepared by the lender --refer to the credit risk assessment notes in this article for more information.

The period may differ by lender however common repayment periods are between 12 and 60 months. Certain lenders may offer maximum periods of 84 months (7 years). Keep in mind, that the longer the period, the more interest you will pay

Yes lenders must allow you to repay the loan early, either as a once off settlement or the lender may allow you to pay your minimum monthly instalment plus an extra amount into your loan account (when you can afford it). This is a great option as you may be able to save a substantial amount of interest and other charges by paying off the loan early.

The lender cannot charge you a penalty should you repay the loan early. When choosing the lender check what type of early repayment options are available.

When you are buying a vehicle, you should aim to pay the lowest interest rate (and administrative costs) available which normally means obtaining vehicle finance by means of an instalment sale agreement or lease. In terms of an instalment sale agreement or lease the vehicle is provided to the lender as collateral, (which means that should you not repay the loan the lender may dispose of the vehicle and apply the sale proceeds to the loan amount outstanding), therefore the risk to the lender is lower and you will be charged a lower interest rate. For more information regarding the financing of a vehicle please refer to the vehicle finance article by click here.  

If you are not able to obtain specific vehicle finance nor be able to draw money from your home loan access facility, then the next best option is probably to use a personal loan.

Criteria
If you meet the following criteria you will likely receive a loan:
• You are a South African citizen with a valid ID document;
• You are an adult (at least eighteen years of age);
• You are currently employed with a regular income and have been employed for a minimum number of months (For example six months);
• You have a bank account in which your salary/income is paid into;
• You have a cell phone number;
• You are not under debt review- for more information on debt review please click here ;
• The lender is satisfied with your potential to repay the loan. This will include a credit risk assessment.

Credit risk assessment
A credit risk assessment is performed by the lender to try and determine if you are likely to repay the new loan on time. A credit risk assessment includes the following:

• An affordability assessment:
o The lender is required to perform an affordability check in order to considering whether you will likely be able to repay the loan;
o The affordability check normally includes reviewing your current income and expenses;
o The lender will normally review your bank statements and payslips covering a period between three to six months, and any other relevant information;
o The better your assessment, the more chance of you getting a loan.

• A credit behaviour assessment:
o Your credit behaviour relates to how you have managed your debt previously, in other words have you always paid your accounts and/or loans on time;
o Your payment behaviour information is regularly sent by the various lenders to one or more credit bureaus who records this information and also calculate your personal credit rating (credit score). This credit score and payment history is made available to those lenders whom you are approaching for a new loan;
o The better your prior credit behaviour (credit score), the more chance of you getting a loan.

When obtaining a loan, you will be charged administration fees (initiation fee, a monthly service fee and potentially a monthly insurance fee) and interest costs. The fees and interest must be based on the National Credit Act, no 34 of 2005 (including its associated regulations), which means that they are limited, however the limits are high.
The admin fee and interest rates may be revised every few years. The lenders will normally charge the maximum amounts allowed in terms of the regulations, however the interest rate charged to you may be lower than maximum allowed in terms of regulation if you are a considered to be a low risk customer. The lender is obliged to inform you what interest rate and administrative fees you will be charged, as well as the repayment amount(s).

The administration and interest charges (Jan 2020) are as follows:
(If you use the calculator on this website it will calculate the charges for you):

Initiation fee -for each loan
• The lender is permitted to charge a once off initiation fee for each loan.
• The initiation fee is added to the loan amount and paid as part of the normal loan repayment(s)
• The fee is calculated as follows:
o Loan amount up to R1000: R189.75 (R165 plus VAT of 15%) for the first R1000;
o If the loan is more than R1000 then over and above the R189.75, an additional amount is charged, being 10% (plus VAT) of the amount loaned in excess of R1000. For example, if the loan is R1500 the initiation fee will be R247.25 (R189.75 plus R57.5 (500X 10%X1.15));
o The initiation fee is however limited to the lessor of 15% of the loan amount plus VAT, or R1207.50 (R1050 plus VAT at 15%).

Service fee for the period of the loan
• The lender is permitted to charge a regular monthly fee during the loan period for the administration of the loan.
• The service fee is added to the loan amount and paid as part of the normal loan repayment(s)
• The monthly fee is calculated as follows:
o R69.00 per month (R60 per month plus VAT);
o During the first month the fee will be pro-rated (apportioned) and will therefore be less than R69.00, if the loan was entered into after the beginning of the month.

Interest for the period of the loan
• The lender will charge interest on the loan balance.
• The interest rate applied is an annual interest rate.
• Interest will be calculated daily but only added to the loan balance once a month. Therefore, the interest is compounded monthly.
• The interest is added to the loan amount is paid as part of the normal loan repayment(s).
• The annual interest rate may not exceed the reference rate (RR) plus 21%. The RR rate is the same as the Repo Rate. The RR as January 2020 is 6.5% therefore the maximum rate that can be charged in Jan 2020 is 27.5% (21% plus 6.5%).
• The lenders however use an interest rate known as the prime rate which is “linked” to the Repo Rate. Therefore, when the Repo Rate changes, the prime rate will change accordingly and in line with the Repo Rate. So, if the Repo Rate goes up 1% then the prime rate will also increase by 1%. The interest charged on the personal loan is normally linked to the prime rate and is therefore a variable rate which means that it can move up or down when the prime rate changes. The maximum interest charged by lenders must still comply with regulations as noted above.
• The interest rate offered to you by a lender will be based on your risk profile therefore it is “personalised”. The lowest rate you could obtain may be 12% (Jan 2020) if you are a very low risk customer. However, most people will be charged a higher interest rate.

Credit life insurance
• The lender is entitled to require you to maintain credit life insurance during the period of the loan.
• The lender may provide you with the insurance which will be added to the loan amount and paid as part of the normal loan repayment.
• If the lender provides you with the insurance, you will be provided with a quote for your consideration.
• The cost of insurance may not (in terms of regulations in 2019) exceed R4.50 plus VAT per R1000 amount loaned.
• Refer to the section in this article named “Must I take out credit life insurance” below for more information on this topic.

Illustrative example:

To view an example of a personal loan click here .  The illustration displays the costs, interest and repayments. The calculations were performed by the calculator on this website named Personal Loan.You can use the calculator to work out values specific to you by clicking here

You should ideally only take out a loan if you really need to, or it will enable you to gain something which will be more valuable than the cost of the loan. For example, you need to purchase IT equipment that will help you generate income.
If you, take-out personal loans you are in many cases likely to be worse off financially. This is because of the high administrative costs and interest charges.
The costs (including interest) associated with personal loan(s) are potentially similar to the amount by which you will be financially worse off by taking the loan. Please refer to the illustrative example below.

Illustrative example
Compare a person who takes out a R50 000 loan repayable over three years (Person B) with a person whom takes out no loans (Person A).
It is assumed below that Person B wishes to buy certain items or pay living costs sooner than Person A and therefore needs to take out a loan. 

Person A is R35 094 better off than person B at the end of the three years. Person A can invest the savings made and would be even better off.

Notes
1) It is assumed both people have the same annual salary and living expenses.
2) All investment income (E.g. interest earned) on savings/spare cash has been ignored to keep the example simple

Yes, you can use the calculator on this website named Personal loans -Repayment which calculates the estimated repayment, admin and insurance costs for you. To access the calculator on this website,click here. 

You may also try and find one on the lenders websites however only a few lenders provide calculators, and if they do provide one, only limited information is displayed.

Providing security for a loan is generally a situation where you (the borrower) provides an asset to the lender, as collateral, which means that if you do not repay the loan (including interest and administration fees) then the lender may take possession of the asset and sell it (unless the asset is already in the form of cash) and use the funds towards paying off the loan.

When taking out a personal loan, you are not required to provide security, and that is why the cost of borrowing money is expensive. The lender is taking a considerable risk that you may not be able to pay back the money and therefore charges you a high interest rate.

The lender will normally withdraw the payment from your bank account on the agreed repayment date which will likely be in the form of a debit order. When taking out the loan this is one of the conditions you will need to agree to.

You may be in a situation when you cannot repay the loan on time, due to various reasons.
The various lenders may apply different rules regarding non-payment, provided they comply with regulations.

The steps generally applied may include the following:
• The lender will likely contact you to negotiate and agree on revised repayment terms. Ideally you should contact the lender first to negotiate revised terms. This process will result in further interest being charged as well as additional administrative costs. Even though the lender may agree to revised payment terms the lender may also report the non-payments, to credit bureaus that maintain your national credit profile.
• If you cannot agree to the revised terms, or you agree to the revised terms but do not comply with them then the following will likely apply:
o Your account will be handed over to a third-party debt collector who will manage the collection process from thereon;
o The debt collector will charge you additional fees;
o You may have a garnishee order submitted to your employer which means that your employer will have to deduct certain amounts from your salary/wage and pay it over to the debt collector;
o Your national credit profile will reflect the non-payment;
o Your national credit rating will be negatively impacted;
o You may not be able to obtain future loans from the lender (or other lenders for some time);

You must keep in mind that other lenders will access your credit profile and rating should you apply for a new loan or overdraft facility with them.

Credit life insurance according the National Credit Act may include insurance cover payable in the event of your death, disability, terminal illness, unemployment, or other insurable risk that is likely to impair your ability to earn an income, or meet the obligation in terms of the loan agreement, however you will need to understand the specifics of the insurance being offered to you by the insurer.

The lender is entitled to require you to maintain credit life insurance during the period of the loan. The insurance does not need to exceed at any time the total amount owing in terms of the loan, however this does not necessarily mean the insurance premium will reduce as your loan reduces, as the insurer is permitted to apply a consistent premium over the loan period. The cost of the insurance is limited in terms of regulations to R4.50 (plus VAT) per R1000 of the loan balance (2019), which and is normally applied using the loan amount at the start of the contract.

It is likely that if the lender requires you to take credit life insurance, they will offer you an insurance policy and if you accept, they will charge you accordingly. You are not obliged to take out credit life insurance provided by the lender. However, if you choose to take out insurance using another insurer the lender will likely request certain information regarding the insurance to ensure it is acceptable to them. The lender may also require that you cede the (suitable) credit life insurance policy to the lender. This means that the in the event of an insured event (E.g. your death) the insurer (policy) will to the extent possible pay the lender directly any amount owing on your loan. The lender cannot demand that you obtain insurance that is unreasonable or obtain it at an unreasonable cost.

Visit as branch
If the lender (such a bank) has a branch near you, you could apply at the branch.

Online
Most lenders have a website loan application processes which enables you to apply for the loan online where-after you will be contacted by the lender to finalise the loan process.

Information /Documents required
You will likely be required to submit (to the lender) various information/documents which may include:
• A copy of your ID;
• Latest payslips;
• Schedule of your monthly income and expenses;
• Copy of your bank statements for the last three (or more) months;
• Proof of residential address (FICA requirement);
• Contact details

Loan agreement
If your loan application is approved, you will be required to enter into a written loan agreement which will set out the terms and conditions of the loan.
As part of the loan application process (and before you agree to the loan) you should be provided with a pre-agreement statement and quotation (loan offer) which includes the financial aspects of the loan together with the terms and conditions. The terms and conditions should be in simple language and it is important that you fully understand them. If you cannot understand them then obtain clarity from the lender. You have no obligation to accept the loan offer and you should have five days to consider the loan offer before deciding.

Some key elements of the loan agreement that you should consider include:
• Is the lender registered with the National Credit regulator;
• The amount of the loan;
• The repayment period;
• The repayment amounts;
• The date on which the monthly amount is deducted from your bank account;
• The interest rate charged and is it within the prescribed limits;
• A breakdown of costs and are they within the prescribed limits;
• The type of credit insurance offered and is the cost thereof within the prescribed limits;
• When and how are statements provided;
• Your personal details and the details of the lender;
• What happens if the loan repayments are late;
• What information is provided to the Credit Bureaus.

There are many lending businesses that enable you to apply online which makes the application process much quicker. You may be able to obtain the loan within 24-48 hours, provided you meet all the criteria and can provide the lender with the required information immediately.

Your personal documents include your identification document, passport, driver licence etc. The lender may not retain the original documents. The lender may request copies of your personal documents which are required in terms of regulations and in terms of its reasonable internal policies.

Be sure to obtain a loan from a reputable lender which has the appropriate licence to loan money.
It would be a good idea to compare offers from a few lenders and a good place to start is with a local bank as most banks will offer personal loans.