If you’re taking out a loan, chances are that you’ve purchased or are about to purchase something that you ultimately can’t afford in cash.
There is no reason to feel overwhelmed by this process since you are one of the millions of individuals following this exact route every day.
The problem is that just because you are after a loan, doesn’t necessarily entitle you to one. There are a number of criteria, financial checks and other nasties that need to take place before you get approved for a loan.
Reasons people take out a loan
Buying a home is a common reason for taking out a loan. You have saved a large amount but there is still a massive amount that needs to be settled and so you have chosen to apply for a home loan.
Or perhaps you’re a student and your parents can’t afford to pay your way through the years of study, so you need to come to the party too, but you don’t have a job, in this case, a student loan would be a good idea.
So, you see, there are many reasons that one would require a loan, despite the fact that you do have access to regular income and are in no particular financial trouble either.
Types of loans in South Africa
- Home loans and property finance
- Business loans and lines of credit
- Lines of credit such as credit cards
- Personal loans which include short-term loans, payday loans, quick loans, debt consolidation loans, bad credit loans and so on
- Bridging loans such as pension and RAF bridging loans or property bridging loans
Don’t over extend yourself with debt
The thing is, however, that you can very easily get into trouble when you have a loan and that is why it’s important that these checks are all performed by the necessary lenders to ensure your affordability and your general paying of accounts status.
When you take out a loan, you are altering your financial status and your lifestyle will encounter changes as well. It’s a commitment that you’re entering into, not maybe as big as having a child or getting married, but to the banks, they might be inclined to say it is.
Managing your debt responsibly requires a strong and well-organized individual that is good at honouring commitments, no matter how big or small.
There are a few things that need to be considered, the hurdles that will need to be conquered when you are searching for a loan, being approved for one and the carrying out of one. So, before you uncap that pen and sign for anything, make sure that you have considered the following loan obstacles you will encounter:
High interest rates on short-term loans
Loans come with interest, it’s that simple. And yes, while you might be painfully aware of this little fact, you might not have considered just how high the interest can get when you’re taking out a short-term loan for example.
This is simply due to the shortened time frame for repayment. This is your first loan hurdle. Lenders perform credit checks and will analyse your payment structures and habits.
If for any reason you don’t have much in terms of credit that you repay on and you have very little collateral, this could attract a higher interest rate than the guy next to you who has these things.
The bottom line is, the fewer criteria a lender requires for approval, the quicker you are likely to be approved. Ergo, faster access to funds, ergo a higher interest rate.
Payday loans as examples of high interest debt
A prime example of high interest debt is a payday loan, where you have access to funds quickly and are required to pay it back in 30 days.
South Africans love this loan type because very few are turned away if any, when applying for this loan, due to the lack of checks or requirements in order to qualify. Bear in mind that no matter how many payday loans you have applied for and successfully repaid, they will not improve your credit score, not the way a long-term loan would.
High monthly instalments
It should be pretty obvious that if one was paying a high-interest rate, then naturally they would be paying a higher instalment. The problem is that you might not be able to afford the monthly instalment for the duration of the loan.
It’s important to understand your own affordability before applying for a loan. Payday loans which need a repayment on your next salary can cause difficulty, because how then do you make it through the following month with that amount missing? These are the things you need to consider.
One too many bills to pay
This hurdle wouldn’t be deemed as an immediate one in the process. However, it can very easily become one.
When taking out a loan, make certain that it won’t be affecting your other bill repayments or simply any day to day expenses that you need to still continue with. Managing all of your finances is important, not only the ones that you have signed a contract for.
While a lender may not be able to see how much you spend on all your living expenses, you know your income and expenses and should be honest with yourself about your ability to afford repayments on a new loan.
Summary of common loan pitfalls:
- Taking out a loan you cannot afford
- Taking out high interest short-term loans
- Becoming dependent on short-term loans and payday loans to make it through the month
- Rolling over payday loans and accumulating extremely high fees and interest charges
- Opting for a shorter loan term and being unable to manage the higher loan repayments
There you have it! Now that you’re in the picture of what to consider before applying for a loan, I would hope that you have come to the best decision about your next step.
Do some research and shop around for the best deals available, because this will guide you in determining the bottom line you are expected to pay each month from your budget.