Before you start your application, you should ask yourself these questions:
- Do I need a loan for an essential purchase?
- Will it be used to reach my goals or advance myself?
If your answered yes for both questions, then you have to read this article before doing anything further. This article will help you understand more about what a personal loan is.
A personal loan, also known as an unsecured loan, doesn’t require you to put up something you own as collateral. You’ll be more likely to be accepted for a personal loan if you have a good credit score and a credit history that shows lenders you can manage credit sensibly.
What is a personal loan?
A personal loan is a form of credit that can help you make a big purchase or consolidate high-interest debts. Because personal loans typically have lower interest rates than credit cards, they can be used to consolidate multiple credit card debts into a single, lower-cost monthly payment.
Here are some of the top reasons people take out personal loans:
- Start or expand a business
- Pay for an unforeseen or emergency expense
- Debt consolidation
- Home improvements
- Vehicle financing
- School or university fees
(Free course: How to build an emergency fund course)
Credit can be a powerful financial tool, but taking out any type of loan is a serious responsibility. Before you decide to apply for a personal loan, it’s important to carefully consider the advantages and disadvantages that can affect your unique credit picture.
It’s likely you’ll receive the loan terms you may qualify for once you’ve completed the prequalification process. If you’ve prequalified with multiple loans, it’s crucial to compare each offer to help you understand the best loan for your situation. In particular, you should compare the following:
- APR. Your APR tells you how much it will cost you to borrow the money you qualify for, which includes interest and fees. A higher APR can drive up the cost of the loan over time.
- Loan term. Your loan term is how long you have to repay your loan, typically between two to seven years. Longer loan terms have lower monthly payments but could cost you more interest over time.
- Loan amount. Your loan amount is the amount of money you can borrow. Be sure to choose a loan that offers you what you need while still being able to afford your repayment obligations.
- Monthly payment. Your monthly payment is how much you’ll owe every billing cycle, typically every 30 days. Make sure to select a loan that offers a payment plan that works for your budget.
- Origination fee. Some, but not all, providers charge origination fees, typically 1% to 8% of the loan amount. You’ll either have to pay this upfront as a closing cost or finance it as part of your loan balance. Ideally, you want to find a provider that charges no origination fees.
- Prepayment penalty. As with origination fees, some providers charge a prepayment penalty. This is a fee that lenders charge borrowers who pay off all or part of their loans ahead of schedule. Fees typically start out around 2% of the outstanding principal balance and fall to zero over the first several years of a loan.
When you borrow money in the form of a personal loan, you pay it back in monthly instalments over a set time with added interest. How much interest you’re paying and how much time you have to pay back the loan differ depending on the amount you’re borrowing and in what timeframe you’re comfortable repaying it.
You can often complete personal loan applications online, and a decision may be available as soon as the same day. However, there are a few things you should do before you even fill out the application. If you’re ready to apply for a personal loan, consider these steps before beginning the process:
- Check your credit score
- Take steps to improve your score by checking for inaccuracies and paying down debt
- Decide how much you want to borrow
- Ask yourself if you’ll be able to pay it back
- Use lender prequalification to shop around for competitive rates
- Submit a formal loan application
If you need a quick influx of cash to pay for necessary expenses, and you don’t have an emergency fund, a personal loan may be a good option. Interest rates for personal loans are usually lower than those of credit cards, especially if you have an excellent credit score.
Of course, you should always weigh the benefits with the drawbacks. After all, taking on a personal loan means taking on debt, and you’ll need to be prepared to make payments on that debt for a few years. If you don’t have the monthly budget for principal payments plus interest, reconsider the amount you need to borrow or the way in which you borrow.
While a personal loan is a useful tool to finance larger or unexpected expenses, there are some situations where it may not be the best option. Before applying, consider your financial situation and the reason for taking out the loan.
The lower your credit score, the higher your interest rate could be. If you have poor credit, shop around for bad-credit loans, which cater to borrowers with a less-than-perfect score.
A personal loan also may not make sense if the loan is used for a purchase that would qualify for a better loan type i.e taking out a personal loan for a purchasing a house instead of applying for a home loan.
What do you need to apply for a personal loan?
- You need to be 18 years or older and qualify for the loan amount.
- Valid South African ID
- Proof of residence no older than 3 months
- 1 month’s payslip
- 3 months’ most recent bank statements
Agreeing to the terms
Before you’re given the loan, you will have to agree the terms with the lender. The terms are how much money you want to repay each month and how much time you will need to pay back the loan. Also note that the amount of interest and the repayment time you’re agreeing to will impact the overall cost of the loan.
You may choose to spread out the loan and make smaller repayments over a longer period of time – and if you’re on a budget this may seem like the best thing to do.
(Free course: How to budget like a pro course)
Even though a lower monthly instalment might initially seem cheaper, paying it over a longer period could add up to cost you more in the end.
Remember to consider all your borrowing options and whether the loan type you’re applying for suits your needs and financial capabilities.
(Free course: How to pay off your debt course)
In closing
Credit can be a good thing if it used wisely, you just need to weigh out the pros and cons of the loan. Avoid taking out a loan you cannot afford. Do, the numbers before taking out a loan. Having something like an emergency fund can help you avoid getting into debt. An emergency fund is created to cover those unexpected expenses.
