The Basics of Borrowing Money in South Africa

The Basics of Borrowing Money in South Africa
February 22, 2024 gnuworld
borrowing money in South Africa

It’s always important to understand what’s involved before you go ahead with borrowing money in South Africa.

Across different loan types, there’s a fair amount of jargon to decode, along with various common practices. if you’re outside the loan industry, you won’t necessarily be familiar with them.

In this article, we explain:

Questions to ask when borrowing money

Before you take out a loan, it’s wise to ask the lender some pertinent questions. This will ensure you don’t end up with more debt than you can handle and aren’t surprised by any fees or penalties.

How much can I borrow?

There are rules about how much you can borrow depending on criteria such as income or credit score. Find out how much you can comfortably borrow based on your circumstances.

What will the monthly repayments be?

Find out how much the monthly repayments will be in total so you can budget accordingly. Make sure the amount quoted includes the interest, admin fees and insurances.

What is the total amount I’ll repay?

With interest, the amount you end up repaying at the end of the loan period will be more than the amount you borrow. Find out how much this is in total before you commit to the loan.

What is the repayment period?

The repayment period is how long you have to repay the loan. The duration will affect the monthly repayment and the total repayment amount.

Is the interest rate fixed?

Ask if the interest rate will go up if the repo rate changes or if the interest rate is fixed and will remain unchanged for the duration of the loan.

Is the loan secured or unsecured?

Ask if the loan is a secured loan that uses collateral or an unsecured loan that’s based on criteria such as income and credit score.

What happens if I miss a payment?

Ask what penalties to expect if you miss a payment, just in case. Ideally, you shouldn’t be borrowing more than you can comfortably repay each month.

Does the loan need to be insured?

Many loans require insurance to cover the loan amount if you die or are retrenched. Some lenders offer their own insurance or allow you to use your own insurance.

Financial loan terminology in South Africa

Understanding financial loan terminology before you go ahead with a loan will help you identify any issues and ensure you aren’t signing a legal document without comprehending the terms.

Secured loan

Secured loans use a physical asset as collateral to secure the loan. This can be a home, a car, a boat or another physical item of value. This item is seized if you fail to repay the loan.

Unsecured loan

Unsecured loans don’t require collateral but the lender must be creditworthy. This is usually measured by their credit history, income and employment status.

Asset-based loan

An asset-based loan is a type of secured loan that uses a personally owned movable asset such as a car, luxury watch, jewellery or gold as collateral.

Principal

The principal is the initial amount of money borrowed, excluding interest or monthly fees.

Loan term

The loan term is the period of time within which you have agreed to repay the loan. This usually ranges between 12 and 60 months but can be as little as 30 days or less for short-term loans.

Nominal interest rate

This is the interest rate advertised by the lender (such as a bank) that doesn’t take inflation into account.

Effective interest rate

The effective interest rate takes the compounding period into account and is a more accurate measure of interest charges.

Annual percentage rate (APR)

The APR is the cost of a loan for the entire year, including interest and any extra costs or fees associated with the loan.

Loan amortisation schedule

The loan amortisation schedule is a comprehensive table of monthly repayments showing the principal amounts and interest included in each repayment.

Loan deferment

With a loan deferment, you can request to temporarily stop making repayments if you are having trouble repaying the loan. The loan will still accrue interest during this time.

Loan origination fee

This is also called an initiation fee in South Africa. It’s a once-off fee charged by the lender to initiate the loan. Often, this fee can be added to the loan amount instead of being paid upfront.

Prepayment penalty

A prepayment penalty is a fee that some lenders will charge if you pay the loan off early before the loan term has elapsed.

Loan default

A loan default is when you fail to make the legally required monthly repayments on a loan. These can be principal or interest payments or a combination of both.

Bridge loan

This is short-term loan that you can take out in anticipation of future funding or a cash injection. This type of loan can be taken out by businesses and individuals.

Movable asset

A movable asset is any asset that can be transported from one location to another. Movable assets include, cars, boats, electronics, jewellery, gold, art, antiques and more.

National Credit Regulator

The National Credit Regulator (NCR) is a local government agency that regulates the credit industry in South Africa. It was established under the National Credit Act 34 of 2005.

How to prepare before borrowing money in South Africa

First, determine how much you need to borrow and how much you can reasonably afford to pay back within the loan period.

You shouldn’t borrow more than you need but don’t underestimate the amount and end up under-financed. You could end up taking out another loan to meet your obligations.

Collect all the supporting documents and personal information you need to get the loan. Have them ready when you make your application (either in person or online).

For an unsecured loan, this information will be related to income and credit history. For a secured loan, you will need information related to the collateral such as proof of ownership for a physical asset.

What we offer at LoanAgainst

At LoanAgainst, we offer secured asset-based loans against a range of personal items such as cars, boats, jewellery, gold, luxury watches and more. We are NCR compliant and offer competitive interest rates.

Our loans are fast and discreet with a simple application process. If you’re thinking of borrowing money in South Africa using an asset as collateral, contact us or apply now and get funds within 24 hours.