Know rights and responsibilities when taking a loan

Every now and then most people will need to think about borrowing money. It may be for a home improvement, repairs to a car, to pay for education or for a medical emergency.

Whatever the reason, a personal loan can be the simplest way for a consumer to meet their financial needs. Before you commit, it’s important to understand how the various financial products work, and your rights and responsibilities.

With so many financial terms, “personal loan” is one that is commonly used but not always properly understood.

A personal loan is money that you borrow from a registered financial services provider and which you must pay back over an agreed period. These loans differ from a microloan, which the National Credit Act defines as a “short-term credit transaction”. Microloans are for amounts less than R8 000 and are paid back over no longer than six months.

There are two kinds of personal loans, secured and unsecured. A secured loan is where you offer something of the same value as the loan, such as a house or car as a guarantee that you will pay back the money. If you don’t pay back the loan over the agreed time, then whatever you’ve offered for security can be sold to get back the money that is owed.

An unsecured loan is not secured with an asset. Instead, your credit record determines whether your application will be approved and the interest you will pay. Your income, credit rating and whether you can afford the loan are some of the details used to decide this.

Applying should be quick and easy. The National Credit Act sets out very strict conditions that loan providers must meet before they can lend you money. These requirements are in place to protect you and put the responsibility on the credit providers to carefully check that you can afford the loan, based on the information you provide.

You will be asked to provide proof of identity, proof of residence and proof of income.

The credit provider must then follow a series of steps before they can lend you money. These include, but are not limited to, confirming your credit score, income, any money you owe as well as how much debt you have compared to what you earn.

Should the credit provider request any additional information on whether you have other income or expenses, it is important, to be honest.

Even if you really need the money, it is a bad idea to borrow more than you can afford. Not only will this ultimately add to your financial pressures, but it may also affect your ability to borrow in future.

The term of the loan is the time you have to repay it. This depends on the credit provider, the amount you borrow, your financial position as well as your preference for repayment.

Usually, the longer the term, the lower the monthly repayments will be but remember you will also be paying interest on the amount you borrowed over a longer period.

There are a few things that determine the interest rate you pay. These include the type of loan you get, who provides it and your credit rating.

Though this may all sound complicated, in reality, the application process is straightforward, feedback is given quickly and the money could be in your account within 48 hours.

  • Fakude is head of consumer insights at DirectAxis.

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