With South Africa’s credit growth increasing from 3.8% in May 2018 to 6.3% in January 2019 and the country’s household debt to income sitting at 71.90 percent, according to the South African Reserve Bank, consumers are cautioned to take heed before taking on any new debt. But, can loans be beneficial?
According to Vera Nagtegaal, executive head of Hippo.co.za, there are different types of loans that consumers can use to help fund their expenses. “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.”
Nagtegaal explains that when you take out a loan, as with any other contract, reading the fine print is important.
“Equally so, you need to know the basics of what type of credit you are getting. When it comes to loans, there are two main types available to consumers; secured loans and unsecured loans.”
Interest rates on both are capped under the National Credit Act (NCA).
In the instance of a secured loan, along with a promise to repay, the borrower puts up some surety for the loan. Good examples of secured loans are home loans or car finance.
“The house or car is the asset and if you fail to repay the loan as per the loan agreement, the bank has the right to repossess it to offset the debt you owe them,” Nagtegaal explains.
The interest rate on a secured loan tends to be lower than with unsecured loans. The NCA cap on a secured loan is calculated as the repo rate x 2.2 + 5% per year. Since the repo rate is currently 6.75%, the maximum interest rate you could be charged for a home loan, for example, would be 19.85%.
Unlike secured loans, an unsecured loan is where the bank or creditor lends you money based on your affordability or how much you are able to repay each month. This is calculated after weighing all your expenses against your income. Types of unsecured loans include personal loans, retail instalment contracts such as gym memberships or retail account facilities, and credit cards.
While there is a benefit to the various types of unsecured loans, Nagtegaal cautions that creditors can charge much higher interest rates on unsecured loans.
Under the NCA, the current maximum interest rates on unsecured loans are:
• Unsecured credit (personal loans): (Repo rate x 2.2) + 20% per annum = 34.85%
• Credit facilities (credit cards and store cards): (Repo rate x 2.2) +10% per annum = 24.85%
Why is your credit score important?
When applying for a loan, a key determinant that banks and other credit providers will use is your credit score. Your credit score, also known as a credit rating, is a number that reflects the likelihood of you paying credit back and is based on a person’s credit history reflected in their credit reports. The higher the number the more credit worthy you are.
A creditor must report your credit behaviour to the credit bureaus. This includes information such as how much debt you have and whether you pay timeously. “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,” Nagtegaal explains.
A simple thing like skipping a single month’s repayment or short-paying a repayment will reflect on your credit profile. Banks also look at your credit score and history when deciding what interest rate to charge you. “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,” she points out.
It is advisable not to only investigate your credit profile after being denied a loan or given a very high interest rate. When it comes to responsibly managing your finances, your credit status, and your debt, it’s best to take on a proactive approach and make sure you check your credit status before applying for a loan. Fortunately, South African legislation makes this easier for citizens by offering access to a free credit report. According to the National Credit Act, South Africans are entitled to one free credit report every year. You can obtain this annual free credit report from any one of the following credit bureaus: TransUnion, Compuscan, Experian, and XDS.
“Loans can play an important role 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,” Nagtegaal concludes.