Loans and consumer credit South Africa

Loans and consumer credit in South Africa

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Loans come in all different types and with different terms in South Africa. They range from a simple money agreement between family members and friends to more complex loans such as student loans, payday, auto, and mortgage loans.

Credit unions, banks, and loan sharks lend people money for different reasons, but essential items like home, student loan, or a car. Other forms of loans such as Department of Veterans Affairs and small business loans are only available to a specific group of business people. Regardless of type of consumer credit or loan and its repayment conditions, every loan is regulated by state and federal guidelines to protect customers from unpleasant practices such as extreme or unwarranted interest rates. Additionally, the length of the loan should also be explained to consumers in order to avoid potential legal actions against you or some confusion.

It is always advisable to check what kind of a loan is available to you. For example, if you need money to buy a car, familiarise yourself with all kinds of car loans and consumer credits to avoid some misunderstandings or end up paying too much interest rate.

Types of Consumer Credit

Two types of credit are open-end and closed-end consumer credit. Also known as Revolving credit, Open-end credit can be used continuously for purchases that will be repaid monthly. However, you can also pay the full amount if you can. The most common type of Open-end is home loans, and credit cards. You can use credit card to buy food, clothes, or any small item. Interest is only added

Closed-end consumer credit, better known as instalment loans, is used to finance a particular intention for a specific period of time. Customers are required to follow the repayment schedule until the loan is fully paid-off. Failure to do so, the loan company will call and ask when are you paying back the money.

Instalment’s interest rates differ from one Loan Company to another. However, interest rate is fixed closely to the consumer’s credit rating.

Closed-end credit examples:

  • Car loan
  • Payday loan
  • Appliance loans
  • Mortgages

Common Types of Loans

Loan types are different because people need them for different reasons. The length of the loan and interest rate are also calculated differently. Below are different types of loans that one can look at when looking for a loan.

  • Mortgages – are loans offered by banks to allow customers to purchase houses or property if they cannot afford to pay cash or upfront. This type of loan is tied o your house or property, meaning if you fall behind on payments, you risk foreclosure. Mortgages have low interest rates.
  • Student Loans – this type of loan is given to students who want to further their studies at tertiary institutions. Two types of student loans are available. We have private student loans and federal student loans. Federal student loans come with lowest interest rates and they are better.
  • Personal Loans – this type of loan can be used for personal stuff such as fixing the house or buying furniture for your house. However, personal loans terms and conditions depend on your credit history.
  • Auto Loans – this loan is tied to your home just like mortgages. If you don’t have enough money to buy car cash, auto loans can help you afford a car, but if you skip payments, you will be at risk of losing your vehicle. Auto loans are offered by car dealerships and banks. However, their interest rates are usually higher than usual.
  • Small Business Loans – this loan is distributed to upcoming business people to help them start their own businesses or to extend their businesses.

Before borrowing money, make sure you understand terms and conditions that come with each loan. Also familiarise yourself with loan terms and repayment schedule. Know what will happen to your car or property if you miss payments. Speak to your bank or loan companies to understand this better.

How to find the right home or property loan

There are many property and home loans available out there. We will help you find a better one. We will help you find a loan that will suit your needs. Our listed home loans and brokers will also help you complete the paperwork, all required documents and submit them to your lender.

Pros and cons for types of home and property loans

  • Fixed – the interest rate is fixed for a specific period of time. Normally they range between one and five years of the loan. This means that you need to be consistent when making payments despite the changes in interest rates. When you have completed the fixed period, you can decide whether to fix the rate again or not.

Pros

  • Your normal repayments are not affected when interest rates increase
  • During fixed period, you can be able to manage your other household expenses because you already know how much you need for the house loan

Cons

  • There’s limited opportunity for extra payments
  • You can end up paying a lot of money if the interest rates increase
  • You don’t benefit even when the interest rate decreases. Your monthly repayments stay the same
  • You can be penalised if you decide to cancel the loan before the end of the fixed term

 

  • Variable – variable loans are most common home loans. Interest rates increase or decrease all the time depending on the official rates set by Reserve Bank of a specific country and subsidy costs. A loan that offers a discounted interest rate is available but it offers few loan features such as repayment flexibility and redraw service.

Pros

  • When interest rates go down, the amount of your minimum monthly settlements also go down
  • This also allows you to make additional repayments
  • This option usually doesn’t come with redraw services

Cons

  • When interest rates increase, the amount of your settlements also increase
  • Increase in interest rate can also affect your household budget. Make sure you are aware of this

 

  • Interest only – in this type of loan, you only repay the interest on the borrowed amount. This usually happens between one and five years of the loan. Your monthly settlements are also lower. These loans usually attract investors or business people who later sell their property once they paid off both principal and interest.

Pros

  • Repayments are lower
  • You have the flexibility to pay everything off
  • It is not a fixed rate loan
  • Everything is convenient for you

Cons

  • At the end of your interest rate term, your regular repayments might suddenly increase
  • You still have the same debts as when you started at the end of interest rate term

 

  • Split rate loans – your loan amount is divided. One part is fixed and the other is variable. Yu chose the amount you want to pay of the fixed and variable.

Pros

  • When interest rates increase, your monthly repayments just differ a little
  • When interest rates decrease, so is your repayments
  • You can also pay the variable part faster if you want

Cons

  • You will be penalised if you exit the fixed part of the loan
  • Only limited extra amount are allowed
  • Your normal repayments increase when interest rates increase

 

  • Low Doc – this type of loan is popular among self-employed people as they require fewer documents. However, they come with higher interest rates than most. We would advise people to consider other type of loan as this one is a little bit complicated. But if is your only option, you can take it. Ask for more information to avoid some misunderstandings.

Pros

  • Require few documents
  • May overlook your credit score

Cons

  • For this type of loan, your interest rate is higher than other type of home or property loans

Image Courtesy: golegal.co.za

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