Things to Consider Before Taking Out a Loan

Credit: Supplied.

The recent VAT increase and the largest petrol price hike ever has put South Africans under increasing financial pressure and a loan can seem like an attractive option to bridge financial shortfalls. However, borrowing money from unscrupulous lenders can have dire consequences for a person’s financial wellbeing and consumers are advised to exercise caution when pursuing a loan.

“Reputable lenders can offer an invaluable service,” says Taryn Schmidt, Chief Marketing Officer at short-term lender, Wonga SA. “But, not all lenders are created equal, and it’s important to check a few crucial boxes when taking out a loan”, she advises.

Check 1: Choosing a loan

There are different types of loans that suit different purposes so it’s important to understand what kind of loan is required.

Secured loans tend to be for larger amounts of money, say over R250 000, and for longer periods of time, typically five years or more. Home loans are a form of secured loan, whereby money is borrowed against the value of the property. Missing a repayment on a secured loan carries the risk of losing the assets tied to the agreement. The main benefit of secured loans, other than being able to borrow more money over a longer period, is that the interest rates on offer tend to be low and can be fixed or variable.

Unsecured loans on the other hand are usually used for smaller sums, of R5 000 or more, and over shorter periods of time, say a few years. They don’t require any personal assets to be tied into the agreement, although failing to repay the loan will still have serious consequences.

“Short term loans facilitated online, such as Wonga loans, are also unsecured loans. This type of loan is usually for sums from R500 up to R8 000, to be repaid over a period ranging from a few days up to six months.

“According to the National Credit Act (NCA), interest rates on these particular loans must be disclosed as a monthly interest rate and borrowers can be charged interest of no more than five percent a month or 30 percent over six months,” explains Schmidt. “Some lenders charge lower interest fees, such as Wonga, so it’s best to shop around when looking for the loan that best suits you.” she continues.

Check 2: Do a credit check

All legal credit lenders are registered with the National Credit Regulator (NCR) and receive a National Credit Provider number (NCRCP). Schmidt advises borrowers to check if their chosen lender is registered, especially if the interest rates or lending terms don’t add up.

Borrowing from an unregistered lender comes with the risk of being charged unregulated interest rates and clients may have no legal recourse should the lender act in an illegal manner.

Check 3: Protect yourself

“No reputable credit provider will ever ask a client to hand over their ID, debit card or South African Social Security Agency (SASSA) card to keep as some form of surety. Lenders who do so are not operating within the limits of the NCA”, warns Schmidt.

She also cautions lenders to be on the lookout for scams, the most common of which is the Advanced Fee or 419 scam. In this case, people are offered great loans no matter how bad their credit rating. All that is required is for the applicant to pay a fee to initiate the transfer of their loan. Scammers often try to justify this payment as a registration or legal fee. Unfortunately, once this fee has been paid, the lender often disappears and the victim never receives any money.

Check 4: Is it affordable?

While the NCA requires lenders to determine whether borrowers can afford the loan, Schmidt advises people to take a close look at their finances and whether they will be able to comfortably make the required repayments.

Check 5: Read the Ts & Cs

The terms and conditions provided by a lender are legally binding. Items that could be included are additional fees, such as arrangement or administration fees, and it’s critical for borrowers to know exactly what they’re being charged, over which period, and what the legal ramifications and options are in terms of defaulting on repayments or being able to settle early without penalties.

“Our advice would be to ask questions – if the loan contract contains jargon or clauses that are unclear it’s the borrower’s right to query these. As with any legally binding contract it’s critical that borrowers understand what they’re committing to before they sign,” Schmidt advises.

“While a loan should never be entered into lightly, completing these five checks will ensure that a client borrows from a reputable lender, at a set interest rate with a manageable repayment schedule.”

Issued by Wonga