5 Steps To Get A Loan That’s Right For You

These days, many South Africans are struggling with their finances. With interest rates going up, people are spending more on paying back debts or taking out loans to cover daily expenses. A recent report from Nedbank, one of South Africa’s big banks. It is found that 42% of South Africans have trouble managing their debt. This has made 67% of them worry so much about their debt that it affects their mental health.

Sometimes, using a credit card is necessary, like when booking travel. But if someone is borrowing to pay regular expenses, raising their credit limit, or using borrowed money to pay off other debts. It might be a sign of financial trouble.

What Is A Loan?

A loan is a financial obligation of two parties, one of which provides cash or other resources, and the second promises to return them according to the principles of urgency, payment and repayment.  A loan can be a truly beneficial financial tool. It often turns out that it is cheaper to purchase the necessary things or services right now.

How Much Can You Borrow?

This depends on various factors, such as your salary, credit score, and spending habits. Personal loans typically range from R1,000 to R250,000.

How Do You Apply For a Loan?

Most lenders and comparison sites have streamlined the process. You just need to complete a three-step process to receive loan offers within minutes. Each lender has a similar application process, requiring you to provide your personal details, bank statements, and proof of income.

Excellent! Now that you have a better understanding of personal loans, follow our step-by-step guide below.

5 Steps To Get A Loan That’s Right For You in South Africa

Getting a loan can be a significant financial decision that impacts your future, so it’s crucial to choose the right one. In South Africa, the loan landscape is diverse, with numerous options available to suit various needs.

So if you want to buy a house, start a business, or cover personal expenses, this process can make all the difference.

1. Assess Your Financial Situation

1.1. Check Your Credit Score:

• Obtain your credit report from South African credit bureaus like TransUnion, Experian, or Compuscan. You are entitled to one free credit report per year from each bureau.
• Having a higher credit score makes it more likely for you to get approved for loans and access better interest rates. Work on improving your score by paying off debts and correcting any errors on your report.

1.2. Analyze Your Income and Expenses:

• Calculate your monthly net income (after taxes).
• List all your monthly expenses, including rent, utilities, groceries, transportation, insurance, and discretionary spending.
• Determine your disposable income by subtracting total expenses from your net income. This will give you an idea of how much you can afford in loan repayments.

1.3. Evaluate Your Debt Situation:

• List all existing debts, including credit cards, personal loans, and mortgages.
• Calculate your debt-to-income ratio (DTI) by dividing your total monthly debt payments by your gross monthly income. Lenders prefer a DTI of less than 40%.

2. Determine the Type of Loan You Need

2.1. Personal Loans:

• Unsecured loans used for various personal needs, such as medical expenses, home renovations, or consolidating debt.
• Usually have fixed interest rates and repayment terms ranging from 12 to 60 months.

2.2. Home Loans:

• Secured loans for purchasing property.
• Require a deposit (usually around 10% of the property value) and have longer repayment terms, often up to 20 or 30 years.
• Consider additional costs like bond registration, legal fees, and transfer duties.

2.3. Car Loans:

• Specifically for purchasing vehicles.
• Can be secured (using the vehicle as collateral) or unsecured.
• Usually have repayment terms between 12 and 72 months.

2.4. Student Loans:

• Loans to cover educational expenses such as tuition, books, and living costs.
• Often have flexible repayment options, including deferral of payments until after graduation.

2.5. Business Loans:

• For starting or expanding a business.
• Can be secured (using business assets as collateral) or unsecured.
• Terms and amounts vary widely depending on the business plan and financial health.

3. Research and Compare Lenders

3.1. Traditional Banks:

• Offer a wide range of loan products with competitive interest rates.
• May have stricter eligibility criteria and longer approval processes.
• Examples include Standard Bank, Absa, FNB, and Nedbank.

3.2. Credit Unions and Co-operatives:

• Often provide lower interest rates and more personalised service.
• Membership may be required.

3.3. Online Lenders:

• Convenient with faster approval times.
• Can offer competitive rates but beware of terms and conditions.
• Examples include Wonga, Lulalend, and RainFin.

3.4. Microfinance Institutions:

• Suitable for small amounts and short-term needs.
• Higher interest rates compared to traditional lenders but more accessible.

3.5. Peer-to-Peer Lending Platforms:

• Connects borrowers with individual lenders.
• Can offer flexible terms and competitive rates.
• Examples include platforms like RainFin.

4. Understand the Loan Terms and Conditions

4.1. Interest Rates:

• Compare fixed vs. variable rates: fixed rates remain the same throughout the loan term, while variable rates can change based on the market.
• Understand the annual percentage rate (APR), which includes interest and fees, providing a more accurate cost of the loan.

4.2. Repayment Period:

• The duration you’re given to pay back the loan. Longer terms mean lower monthly payments but higher total interest paid.
• Ensure the repayment period aligns with your financial capabilities.

4.3. Fees and Charges:

• Look for origination fees, late payment penalties, early repayment penalties, and any other hidden fees.
• Request a breakdown of all fees in writing.

4.4. Repayment Flexibility:

• Check if the lender offers flexible repayment options such as payment holidays, the ability to make extra payments without penalties, or changing the payment due date.

5. Apply and Secure Your Loan

5.1. Gather Documentation:

• Prepare necessary documents: proof of income (payslips or bank statements), identification (ID or passport) and proof of residence (utility bills).
• For secured loans, additional documents like property deeds or vehicle registration may be required.

5.2. Complete the Application:

• Fill out the application form accurately. Errors or oversights may result in delays or denials.
• Whether applying online or in-person, double-check all provided information.

5.3. Approval and Disbursement:

• Once submitted, the lender will review your application and verify your information.
• If approved, you’ll receive the loan agreement detailing the terms and conditions. Read it thoroughly before signing.
• After signing, the funds will be disbursed to your account. Make note of the repayment schedule and start date.

Additional Tips

Consult a Financial Advisor:

• If uncertain, seek advice from a financial advisor to guide you through the process.

Avoid Predatory Lenders:

• Be cautious of lenders offering extremely high-interest rates or asking for upfront fees.
• Research lenders’ reputations and read reviews and testimonials to ensure credibility.

Plan for Repayments:

• Set up a budget that includes your loan repayment to ensure timely payments.
• Consider setting up automatic payments to avoid missing due dates.

By following these detailed steps, you can confidently navigate the loan process and choose the best loan that fits your financial needs and situation in South Africa.