Are you considering taking out a loan? If you’re new to borrowing, the process can seem daunting. Will you be able to meet repayments? How do you know you’re getting a good deal? Are you choosing the most appropriate finance product for your particular circumstances? Will you be accepted by your chosen provider? What will happen if you default on your loan…?
To help make the process a little easier, we’ve created a quick guide to the different loan types available in South Africa. Different varieties of loan will be more or less suitable for each individual – and their particular financial needs. This short introduction will explain the key loan types, who can access them and when they are most appropriate…
Home loans
Also known as mortgages or mortgage bonds, home loans are designed to help buyers purchase property. Typically buyers will be required to put down a deposit towards the cost of the property ranging from 5-10%+ of the value of the property (although in some cases 100% home loans are available). The larger the deposit you are able to place on a property, the lower the interest rate for the loan is likely to be (as mortgage providers face less risk).
Interest rates for home loans vary widely, depending on the provider, the property market, the economy, the type of loan you choose and other factors. Some common types of home loan include variable interest mortgage bonds, fixed rate home loans and capped home loans. You can learn more about what each type offers here.
Personal loans
Personal loans are designed to cover smaller financial requirements (up to a maximum of R10,000) and there is no limitation placed on how customers use the money. Wonga’s guide to affordable loans advises customers to compare the cheapest loan interest rates in South Africa before committing to a personal loan product – this will ensure you get the best possible deal as interest rates vary widely from lender to lender. This financial product is offered by banks, online providers and credit unions.
Personal loans are not secured against property (i.e. Your property or car), instead customers must commit to an agreed repayment plan (usually one lump sum on an agreed date) following affordability checks. If repayments are not made, providers can add penalty fees. Different providers may stipulate different courses of action for defaulted loans, so be sure to check how potential lenders are likely to respond in the worst case scenario before you agree to a loan.
Instalment loans
Like personal loans, instalment loans can be used to fund any expenses without restrictions on the customer. This type of loan product, however, can be used to borrow larger amounts over a longer period. The debt is paid off in instalments over an agreed timeframe. As loans are typically longer and larger, the interest applied may be more expensive over the long term than that applied to a one-off, lump sum personal loan.