Understanding the different types of loans available in South Africa
October 16, 2017
What is there to understand about different types of loans?
- Understand the complexities of the lending industry
- We recommend researching online
- Avoid digging yourself into further debt
- Selecting the right loan is vitally important
- Our loan guide will help you make the right decision
Like it or not, debt stimulates South Africa’s economy!
Credit forms an integral part of any growing economy.
Without credit, there would be very few homeowners or vehicles on the road.
Consumers need money for different reasons, but understanding the complexities of the lending industry could create even more debt for naive borrowers.
So, before taking out a loan consumers must undertake educated online research.
Failure to do so might end up with the borrower:
- Taking out the wrong type of loan
- Paying higher interest rates than is necessary
- Creating even more debt
- Endangering their assets if defaulting on repayments
Take a look at this breakdown of different types of loans
A Consolidation Loan enables borrowers to place all their eggs in one basket.
If the application is successful, a bank will settle their clients’ outstanding debt, allowing the borrower to pay one monthly instalment on a Consolidation Loan.
Generally, a Consolidation Loan will offer better interest rates than the amounts payable on several debts, saving the client money and improving liquidity.
Micro Loans are a popular choice for people seeking quick cash.
These loans are also referred to a Payday Loans because borrowers can access amounts of between R100 and R3 000, payable at month-end, or payday.
While offered by certain banks, Micro Loans are usually easier to obtain from smaller lending companies.
However, consumers should deal only with reputable companies because there are a large number of loan sharks operating under the radar of the National Credit Act (NCA).
Unsecured Personal Loans are another popular form of financing in South Africa.
The attraction of this type of loan is that the borrower does not have to provide any form of collateral to obtain financing.
However, unsecured Personal Loans usually attract high-interest rates because lenders regard them as “high-risk” advances by financiers.
You can get loans quickly, sometimes within 24-hours, and are usually for more modest amounts of cash.
Repayment periods are also much shorter.
Defaulting on an unsecured Personal Loan
Not having to provide security to obtain this form of financing does not mean that borrowers will escape serious consequences should they default on their repayments.
Lenders can enforce court judgements against their clients, forcing them to repay the loan in the form of a garnishee order.
Courts can even overrule the terms of the loan contract, declaring them as secured loans.
The borrower then stands to lose fixed property or other assets.
Secured Loans are “low-risk” because borrowers have to provide collateral such as a fixed property or motor vehicle in exchange for cash.
This form of financing offers lower interest rates, higher loan amounts and longer repayment periods.
However, defaulters also face serious consequences.
Finance houses will repossess and sell off the assets to repay the loan if the borrower fails to meet monthly repayment instalments.
Another factor to take into consideration is that higher loan amounts often attract prime interest rates.
As the name implies, home loans, also known as mortgages, are granted by banks or home loan companies to consumers needing finance to purchase a property.
To qualify for a home loan, borrowers must provide a deposit towards the purchase. This can be up to 20%.
So, if a client wants to purchase a property for R850 000, the deposit required will be R170 000.
Defaulting on home loan repayments can result in repossession of the property by the finance house. The property will then be auctioned to offset the outstanding balance of the loan.
If the sale of the property result in a plus balance, that amount of money will be returned to the defaulter.
However, should the sales price of the property be lower than the outstanding balance of the loan, the borrower will still be personally liable to settle that amount.
Generally, banks are happy to issue credit cards and will turn a blind eye to late payments for some months before taking any action against the holders.
Credit cards attract high-interest rates and make a lot of money for South African banks because most holders spend money they don’t actually have.
Banks and major store chains issue credit cards with set amounts that holders are entitled to spend.
Consumers love the convenience of credit cards not only because they give access to shopping without real cash on hand, but also because of the array of services available.
These include hiring a car, booking tickets online, or making bigger purchases such as new appliances or furniture for the home.
Also on the plus side is that credit cards can help build good credit ratings if holders pay their monthly instalments on time.
An increasing number of South Africans are turning to Student Loans to help further their education.
Obtaining a university degree or attending a college is extremely expensive.
Not everyone qualifies for a bursary or has sufficient money to finance their further education.
Student loans can be used to pay university or college fees and depending on the borrower, could also finance the cost of textbooks and accommodation.
The beauty of a student loan is that it is only repayable when the student completes his/her education and enters the workplace.
Interest rates fluctuate, depending on the amount of the loan and the repayment period.
Consumers are urged to research all options before selecting a loan best suited to their individual needs.
There are several online loan quote providers who assist consumers at no cost whatsoever.
Next step: complete and submit the form to apply for a loan online!
All info was correct at time of publishing