What are personal loans?
Personal Loan is an unsecured credit provided by financial institutions based on criteria like employment history, repayment capacity, income level, profession and credit history.
Personal Loan, which is also known as a consumer loan is a multi-purpose loan, which you can use to meet any of your immediate needs.
Personal Loans In South Africa?
Different types of personal loans and how they work
The term “personal loan” is generic for any type of loan taken out by a consumer. Personal loans are categorised into two different sub-categories, namely secured loans and unsecured loans.
Secured personal loans
A secured personal loan requires a piece of collateral as a form of security in the event that the loan can’t be repaid. In the example above, John takes out a secured loan where an item of considerable value is considered collateral for the R10 000 personal loan. This is an example of a secured loan.
Other types of secured loans include:
Home loan (bond) – used to purchase real estate
Any type of motor vehicle loan (car, boat, etc.)
Home equity loans (aka a second bond) – this is home “refinancing”, using the equity in your home as collateral
Title loans – used to take out loans against paid off vehicles, i.e. “pawning” your car
Unsecured personal loans
Unsecured personal loans don’t require collateral. Unsecured loans use the consumer’s financial reputation and credit score as proof that the consumer has the financial ability to repay the loan.
A consumer may request an unsecured personal loan from a bank for reasons such as:
To pay for major life events such as a wedding, a costly vacation, or a funeral
To pay for home improvements
To cover education costs
To consolidate debt into one loan from many smaller loans and credit cards
To purchase home appliances
Any other type of larger purchase where the consumer doesn’t have available funds
Personal loans, whether secured or unsecured, have agreed terms set by the money lenders (financial institutions). These terms state the loan repayment amounts, how often these need to be paid and the length of time before the loan is paid back in full. The loan terms also state the interest rates, or cost of the loan, that will be charged.
Steps to consider when taking out a personal loan
When taking out a personal loan, keep in mind the following tips:
Review your current financial obligations to be sure you can afford the payments
Compare loans from multiple banks to ensure you obtain the best personal loan interest rate
Be honest when declaring your income and expenses
Review the potentially large purchases in the future, which may be affected by the loan, such as a home purchase, wedding, car purchase, etc.
Now you can consider yourself a seasoned expert in the basics of personal loans. Understanding personal loans isn’t rocket science but, as you can see, it helps to know the basics.
What are the benefits of availing of a Personal Loan?
Unlike other types of loans like Home Loan or Gold Loan, where you must provide several documents, Personal Loans require minimum documents and the approval process is quick.
With various financial institutions offering Personal Loan online services, the loan amount is disbursement within a few hours provided the lender is convinced of your repayment capacity.
Another significant feature of Personal Loan is that the lenders offer you the flexibility to choose your loan tenure. Usually, Personal Loan tenure ranges from one to five years. So, you can select the loan term based on your repayment capacity. You should opt for a shorter loan, so that you can save on the interest payment and repay the amount faster.
What is the maximum amount that you can borrow?
The maximum amount that you can avail depends on your income level, your profession and the lender’s assessment of your loan application. Generally, the lenders sanction the loan based on their calculation, so that the EMI is not more than 40% – 50% of your monthly income. Also, the lenders consider if you have any dues while calculating the loan amount.
If you are a business owner or self-employed, the lender will determine the loan amount based on the profits earned and recorded in the profit and loss statement. If you are a salaried professional, the lender will determine the amount based on your salary and other liabilities.
Is it possible to apply for a joint Personal Loan?
Yes, you can apply for a Personal Loan jointly with your spouse, or any other family members like parents or siblings. One of the benefits of applying for a Personal Loan with a co-borrower is that the lenders will consider both the applicants’ income while determining the loan amount. This means that you can apply for a higher loan. However, you must know that if the co-borrower has a poor credit history, there is a risk that the lender might reject your loan application.
What are the documents required for Personal Loan application?
Although the documentation varies from lender to lender, some of the essential documents you must provide along with your application form include:
Proof of income (salary slip, bank account statement, ITR forms)
Proof of residence and identity proof
Certified copy of your degrees and licence (this is applicable only for self-employed applicants).
How Personal Loans Work
Credit comes in many forms, including credit cards, mortgages, automobile loans, purchase financing over time and personal loans. Each type of credit serves a certain purpose for a goal you may have, whether it’s to buy a house or car, or to allow you to break up a big expense into more manageable monthly payments.
A personal loan is a form of credit that can help you make a big purchase or consolidate high-interest debts. Because personal loans typically have lower interest rates than credit cards, they can be used to consolidate multiple credit card debts into a single, lower-cost monthly payment.
Credit can be a powerful financial tool, but taking out any type of loan is a serious responsibility. Before you decide to apply for a personal loan, it’s important to carefully consider the advantages and disadvantages that can affect your unique credit picture.
What are personal loans usually used for?
The list of common purposes for a personal loan include financing a large purchase, covering an emergency expense and consolidating debt. Personal loans, which are typically unsecured, are paid back in monthly installments with interest.