Be smart with a personal loan

Last updated on 13th December, 2017 at 10:03 am

While personal loans offer a financial boost when you need cash in a hurry, they can also drive debt. What should you be aware of if you want to use a personal loan wisely?

Ranging from small to large amounts, personal loans are a relatively quick way to obtain funds for almost any purpose, project or purchase, be it for emergency medical treatment, renovations to your property or a luxury trip abroad. In addition, a loan allows you to spread the cost of a purchase and manage your short-term finances more easily, especially if your loan has a fixed interest rate. Having said that, loans more often than not tend to drive debt, so the first thing you should ask yourself when taking out a loan is: “Do I really need to borrow money?” If a loan is unavoidable, you should carefully analyse your personal finances and calculate exactly how much you can afford to borrow based on how much money you can spend on repayments each month, once your other financial commitments have been honoured.

When to use a loan

As a rule of thumb, you should only consider a loan to finance an asset that will appreciate in value, such as a home or a business. Alternatively, you can borrow money for a special project such as financing your own or your children’s education as an investment to ensure improved future earnings. Conversely, you should steer clear of borrowing money to spend on wants instead of needs, or to buy something that depreciates in value, such as that desirable set of golf clubs, a fancy IT gadget or designer jewellery.

Use it smartly

Competition in the personal lending space is intense, so comparing offers is crucial to ensure that you: a) choose the best deal, and b) are not taken for the proverbial ride by a shady lender. It is very important to choose the most appropriate credit option with the lowest interest rate and the most convenient terms, from the variety of products on offer. Remember, the longer the term of your loan, the more interest you pay. However, should you consider paying off the loan in a shorter period than stipulated, also, in terms of interest, make sure that you know exactly what the implications will be. It may also be worth your while to investigate whether there is a specialist lender who can provide a loan tailored to your specific purpose, for example buying a car, since that lender may offer you a cheaper or more suitable loan.

Beware of the trappings

Because not all lenders are responsible and registered with the National Credit Regulator, it is important that customers do their homework thoroughly. For example, before accepting a loan, it is important that you read the ‘small print’ so that you know exactly what you’re in for in terms of total repayment cost. As fees and charges may be ‘hidden’ by unscrupulous lenders, you may be in for a nasty surprise when it comes to repaying the loan, so make sure you enquire about this. When asked to pay any fee up front, this should raise a red flag that the offer may not be legitimate and that you should rather avoid it. Most legitimate short-term lenders do not require any fees to be paid up front. Sometimes a lender may also charge a lower interest rate, but charge higher fees to make up the difference. It’s also important to know that should you for some or other reason default, you will face certain penalties. This may negatively affect your credit rating and future access to credit. At the end of the day, it may be difficult to remain objective when you’re in need of money. However, if you fail to do your homework properly and consider all the risks, advantages and disadvantages associated with borrowing money, it may eventually cost you dearly.

By Wilma de Bruin

Find out more about Sanlam’s personal loan options – click here.