Different types of loans in South Africa
When considering what loan option to choose, you must first familiarize yourself with what is available. Whether it’s for work related finances or personal needs, long term or short, there are a whole host of loans available, varied to suits your financial needs. In order to help you on your way and protect your against common, loan specific mistakes, we have delved into the pros and cons of the different types of loans available in South Africa.
Installment Loans
Installment loans are loan amounts that are paid back over time, through monthly installments.
Personal Loans
A loan of this type is one paid directly to you from your creditor, for you to do with as you please. Although these are usually taken out to cover other similar loan expenses, they are not set and can be used in any way if the circumstances change. Paid back through monthly installments, the interest rate will be determined by your affordability and credit rating.
Student Loans
Financial support to ensure your education is taken care of, a student loan allows you to cover tuition fees and accommodation if living out of home. A huge help to many students on a global scale, this is the best way to ensure your fees aren’t forgotten- education is after all, key to success. Not without its nay-sayers, student loans are seen to some as a trap, creating huge debt that can be carried for decades. It is still however, the best way to finance your education.
Home Loans
Ensuring you have the money at hand to secure a bond, a home loan gives you a large amount of money that can be used to put a roof over your head. A loan type that most people will have an experience with at some point or another, these can often be adjusted in rate and repayment to best suit your position. A helping hand when buying property, these give you the boost you need to invest in your future and make your house a home.
Pension Backed Loans
In short, this is a way of lending that allows you to guarantee the loan with your pension or provident fund. This is a form of secured lending that allows you to use 50% of your pension fund as collateral in case you cannot pay back the loan within the repayment time period. Repayments are deducted directly from your salary and you need at least R7,000 in your pension fund to qualify.
Business Loans
A business loan works the same as a personal loan, only that the company is in debt rather than a person as such. Using the company as its own entity, this allows for financial assistance in whichever way the company chooses. With a host of options and rates to choose from, depending on your business and its needs, business loans are a preferred method of financing operations in the early days.
Vehicle and Asset Finance
Not only limited to cars, but any vehicle can be funded through vehicle and asset finance. Rates and repayment depending on the requested amount, this is the best way to get yourself a vehicle when you don’t have the cash on hand. Taking into account your credit record and financial history, this can be a cost effective finance option when you need a vehicle.
Micro Loans/Payday Loans
A payday loan is a small loan that is usually used for emergency expenses at the end of the month. With a term that usually sits around one to four weeks, typically these will be paid back when the debtor receives their next pay check- hence the name “payday loan”. Between a few hundred to a few thousand rand, a micro loan allows you to get cash quickly and easily when you need a helping hand.
Overdraft Loans
A way to cover unexpected costs, overdraft allows you to write a cheque to the amount you want to borrow- the limit of which is set by the lender. When you repay a portion, that same amount becomes available for overdraft again. This type of loan doesn’t need monthly payment, instead the money will be taken off when cash is deposited back into your account.
Important Elements of Loans
Secured Loans
This pertains to a loan that is secured by assets. What this means is that the debtor puts up collateral- like a car or property- that ensures payment can be recouped, even if through repossession of assets. Lowering the risk to the creditor, this is a failsafe to make sure the debtor pays on time.
Unsecured Loans
A higher risk loan, this means that there is no assurance of repayment except the promise of the debtor to do so. Usually accompanied by higher interest rates, this is built on trust between you and the credit provider.
Fixed Rate
A fixed rate loan is one in which the interest rate and monthly payments don’t increase over the period of the loan. This ensures that the costs of the loan won’t change and have a negative, unexpected effect on your finances.
Adjustable Rate
This type of loan allows for change over the repayment period. The interest rate can change and in turn so will the monthly installments.
Long Term
Usually for bigger amounts, long term loans are paid over a period of years, sometimes even decades. Like home loans, student loans and other bulk loans, these are divided into fairly small monthly installments.
Short Term
Like payday loans, short term loans are smaller amounts that are repaid within a few weeks or months. With higher installments and higher interest rates, these are usually used for emergency expenses or end of month costs.
With so many options, always make sure you understand what a loan means for your financial stability and future. With options to suit most situations, understanding loans will ensure you get the best possible option for your needs- and make sure you never become over-indebted.