Expert advice on dealing with loans

A loan can be very helpful when we find ourselves in a financial crisis or need to finance an asset like a house. Loans can  also be used to finance education or a business venture.

But before getting a loan, Vera Nagtegaal, the executive head of Hippo.co.za, warns that it is important to know the different types of loans and to understand what each has to offer.

“While the various types of loan products available can benefit consumers, it is critical that people understand the differences between each type as well as what the conditions are for taking them out,” says Nagtegaal.

She says it is important to read the fine print before signing any loan document. 

She adds that “there are two main types available to consumers; secured loans and unsecured loans.” 

Although interest rates on both loans are capped under the National Credit Act (NCA), the difference lies in how much interest rate each can charge.

The maximum interest rate on unsecured loans can be up to 34.85% while for secured loans it can be up to 19.85%. This rate takes into consideration your credit rating. 

 “A client with a good credit score is someone who makes their repayments on time, does not have large outstanding debts, and has not been negatively listed,” says Nagtegaal. 

She explains that "the maximum interest rates are caps on how much interest can be charged on different types of loans. However, the bank has the discretion to charge you a lower interest rate if they deem you to have a good credit history."

The other difference between secured and unsecured loans is that with secured loans, your lender accepts an asset as security that you will pay back the loan. If you default on the payment, they can take the asset. This means if your house is the asset, failure to pay your loan can result in you losing it.

With unsecured loans, the interest rate might be higher, but the Debt-to-income requirements are stricter, meaning the loan amount will be tightly correlated with your salary. 

 “Loans can play an important role in growing a person’s asset base and access to different types of goods and services. But, it is incredibly important that consumers understand how these are structured, what the terms and interest rates are, as well as the importance of maintaining a good credit history,” says Nagtegaal.

Jeffery Sibanda, a financial advisor based in Gauteng, says it’s important to manage your loan repayments well.

“First and foremost, do not take any additional unnecessary debt. There are individuals who are addicted to debt, attracted by small repayment.  They fall into the trap of having more and more loans and end up not servicing them properly,” says Jeffrey Sibanda.

Below he gives tips on how to better manage your loan repayments:

- Always pay your loan or debt on time to avoid penalty fees.

- Aim to pay off the smaller debt quicker than the term and thereafter tackle large debt.

- If your budget allows, pay double to decrease interest and repayment periods.

- Always create and follow a spending plan. It enables you to stay out debt.

- Create a nest egg for unforeseen events and resist the urge to spend impulsively.

- Rule of thumb is 10% of your income must service debt.

- If you are servicing less than the aforementioned, stick to the 10% and channel all towards your debt that way it will be fully paid quicker.

- Always seek advice before attempting additional loans.

- Do a bank account analysis. You might have disposable funds you can properly build up into an emergency fund instead of extra loans.

Image courtesy of iStock/ William_Potter