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27 June 2019
Life’s happened and you’ve emptied out the last coin from the piggy bank… thinking of taking out a personal loan? Getting a personal loan is a big financial commitment, with implications for your credit score. Like any other credit, if used right it can be beneficial, but if misused, it can leave you buried in debt. Sanlam Personal Loans Head of Business, Piet van der Walt, provides guidance on how you can get a personal loan and still be credit-smart.
There are various types of loans such as business loans and home loans, all of which are meant for specific purposes. It’s important that you’re aware of your needs and if a personal loan will be best suited for these.
“A personal loan can be used for personal reasons and comes with a set interest rate and monthly repayments,” says Van der Walt. Although you can use a personal loan for basically anything (travel expenses, school fees, renovations, etc.), “it’s important to take out a loan for something that will appreciate in value,” Van der Walt suggests. For example, taking out a personal loan for a holiday means you won’t have invested in something that will continue to gain value over time – so it’s not necessarily the best kind of thing to accrue debt over. Conversely, taking out a loan for your child’s education is typically investing in their future ability to increase their earnings – investing in something that will (hopefully!) continue to generate a return in the future.
According to Van der Walt: “A personal loan initiation fee is calculated based on your loan amount. It’s also important to ask your lender if they offer credit life cover. Credit life cover works as a form of insurance that makes sure your debt is settled in case life happens and you can’t afford to meet your monthly repayments.”
A credit card and a personal loan can be used for different scenarios, and the payment terms are different. “Credit cards are ideal for smaller purchases which you can typically pay off in a month, while personal loans are ideal for bigger purchases which you can repay over a longer period, like 24-60 months,” says Van der Walt. “Personal loans are typically used to finance a big purchase or consolidating multiple debts.”
Check the interest rate: if you’re going to pay off your debt over a longer period of time, the lower the interest rate, the better. If you opt to use your credit card, make sure you know the minimum payment amount you’ll need to make each month.
Borrowing from an unauthorised lender can be dangerous and can lead to extortionate interest rates. While they may tempt you with easy cash, in the long run, they could cost you more than established credit providers. Plus, reputable loan companies are regulated by law – this is important when it comes to ensuring you’re protected.
“Do your research and only borrow from trusted and authorised credit providers like a financial services provider such as Sanlam,” suggests Van der Walt. A good (and regulated) lender should be able to thoroughly answer questions about their “terms and conditions, repayment terms as well other costs that are included in your loan other than the initiation fee,” he adds.
According to Van der Walt: “The National Credit Regulator (NCR) has a set interest rate band that all credit providers need to adhere to. Although your interest rate is calculated based on your credit score, your credit provider should not give you an interest rate higher than the interest rate cap of repo rate plus 21%.” Anything beyond that is extortionate and illegal.
“This is also why we recommend not taking out a loan through a microlender because they are typically not regulated and can therefore charge high interest rates (as much as 604%).”
Also bear in mind: “The higher your risk profile (based on your credit score), the higher your interest rate,” says Van der Walt. That’s why it’s important to maintain a healthy credit record – more on that below.
Before you take out a loan, consider your current financial situation. Van der Walt suggests that you ask yourself questions like: “What other debt commitments do I have? Can I afford to add another monthly commitment for the next six to 12 months? What am I going to use the loan for (will it advance me or cause another financial setback)?”
If you’re going to take on debt, be smart about it and take advantage of credit facilities that offer loyalty programmes. “Some credit providers give cash-back rewards for every payment you make on your loan,” shares Van der Walt. Not only will it help incentivise and reward you for your repayments, but you’ll be making a saving at the same time.
As a Sanlam Reality member, for example, you can get up to 20% cash back on Sanlam Personal Loans.
“Whether you take out a loan at the beginning or the end of the year, it doesn’t affect your interest rate because this is based on your credit profile,” says Van der Walt. When you take out a loan, “ensure you are aware of the repayment terms and incorporate your monthly installments into your monthly budget to prevent you from defaulting on your repayments,” she adds.
It helps to set a direct debit date for your loan repayment that is immediately after your pay day, so you don’t even have to think about making the repayment on time.
“Take advantage of your annual free credit score offered by TransUnion or use ClearScore, which will show you your credit score for free throughout the year,” says Van der Walt.
It’s important to stay on track of your credit score so you can query any incorrect listing if necessary. If your credit rating is incorrect, you can flag this with the credit bureau. Alternatively, if you have a poor credit score (due to previous missed payments or outstanding debt), you can start working on improving it. Your credit score affects the interest rate you’re offered on credit you apply for, and whether or not you are denied credit when you apply for, say, a bond, loan or even cell phone contract.
Need a personal loan? Remember, as a Sanlam Reality member you get as much as 20% cash-back if you pay your Sanlam Personal Loan over 12 months.