Understanding the cost of borrowing in South Africa 02.06.2020
As a country knee-deep in debt, we are here trying our best to educate our readers about different types of financial instruments for lending and borrowing. We talk about everything ranging from personal loans to payday loans!
In this article, you will learn about the advantages and disadvantages of a loan and costs involved.
Advantages of taking out a loan
You can borrow larger amounts (as compared to credit cards)
Whether or not you are approved for a larger loan amount depends on your credit score is and your ability to service (repay) the debt. If you have managed to avoid defaults, there is a good chance that a large amount will be granted to you by lenders.
Loans are considered better for people needing a large amount of money, whereas, credit card limits increase as you use the credit card, depending on your spending and payback habits. The whole process takes up more time than getting the one-time approval on a large loans.
Flexibility on how you spend your money
There are usually no restrictions on how you can spend a granted loan except for loans granted for specific purposes like housing, car loans or education loans. However, in the case of general loans like personal loans, you are free to use them for your urgent needs or in any way you please.
Although we always advise our readers to keep in mind that the money borrowed may not have any restrictions, but that only leaves more room for incessant spending that lacks self-discipline.
Fewer restrictions on the payment structure
The loan can be paid back over term (duration) which you and the lender agree upon. But remember, while you still have an outstanding balance, the high interest costs can put a dent in your future spending.
Disadvantages of taking a loan
High financing costs
Evaluate your income before getting a loan as you do not want to default on its repayment. Make sure you calculate all the costs involved in getting a loan and have money left aside for emergencies. Defaulting or being late on repayments could damage your credit score or leave you in a debt trap.
You need a good credit score
The average credit score of a citizen of South Africa is below 560, meaning that most of its citizens do not qualify for a loan. There may be lenders that give out loans to a low credit score, but that usually comes at a very high cost.
More now, less in the future
Loans can fund whatever it is that you want now, but it comes at cost of possibly doing less in the future. So consider carefully whether or not you need a loan. Because after you take into account all your other expenses, such as your phone, travelling costs, food AND the loan repayments… You might not have a lot left over for important things, like going out with friends or short term emergencies.
Factors that drive the costs of loans
The bigger the loan, bigger the repayments… So don’t borrow more than what you need. Your income and credit score determines your borrowing capacity. The higher your income and credit score, the more you can potentially borrow.
This is how lenders make money from borrowers. The interest rate can be seen as a “charge” that you have to pay for borrowing money and compensating the lender for the risk they take in lending the money. If your credit score is high or if you secure your loan, you’re likely to get a lower interest rate.
Initiation and services fees
This is to pay for the staffing costs and other overheads (such as rent, their websites, etc) that are involved in processing your loan application and administrating it. Service fees are usually paid monthly.
Length of your loan
If you choose to repay a loan in 1 year instead of 2 years, your monthly repayment amount will be greater. You will repay the loan faster and pay less interest. However, if you want to have a bit of extra cash at the end of the month in your pocket, you may choose a longer term. Your monthly repayments will be less, because they’re spread over a longer term – but at the end you will end up paying more in interest.
We hope that this article will help you in your journey. Remember to research well and always know your capabilities and capacities so that you never end up in a difficult position. If you want to see who has the lowest fees and interest rates as well as flexible terms, check out our personal, vehicle and payday loan comparison tables.
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