When you decide to take out a personal loan, you need to consider the interest rate, service fees, and the term of the loan. These factors will determine how long it will take you to settle your debt.
However, you will notice that you can take out a personal loan from the bank or from a loan provider. We have a look at whether there are any differences, and what you should consider when you take out a loan.
Which institution should you work through?
“Institutions that offer personal loans need to be registered with the National Credit Regulator as an authorised credit provider. Besides this, when it comes to your credit application, both banks and loan providers must use the same criteria to assess your creditworthiness,” says Mitchell.
“However, who you decide to take out a personal loan from should be focused on the terms of that particular contract,” Mitchell says. You should always seek financial advice before deciding on a loan contract if you’re not familiar with financial jargon and the technicalities.”
The pitfalls of unsecured loans
Mitchell points out that you should understand that a personal loan is an unsecured loan, which usually carries the highest rate of interest.
He explains that unsecured loans are a big money spinner for banks, and for the longest time banks have taken advantage of this.
“Initially, personal loans were intended to be a tool for micro-entities to grow their businesses. It turns out that the marketing departments in major banks have given it a different flavour,” says Mitchell.
“My advice to anyone considering a personal loan is to evaluate whether this loan will be used for productive reasons, or for consumption. For example, don’t take out a personal loan to pay for a wedding. Instead, take out a personal loan and start a garden service,” Mitchell says.
It’s important to be cautious when taking out a personal loan, but this doesn’t mean that there aren’t good reasons to do this.
What else should you consider?
When applying for a loan, Mitchell says that you should try to compare a few options before making a final decision.
He adds that consumers are often desperate for cash and will frequently go with the first option presented. However, it is critical to compare:
- The loan amount
- The Term of the loan in months
- The Interest rate
- The Admin or service fee
“It’s imperative to do a like-for-like comparison. Suppose Bank A has a repayment amount of R1,000 per month over a 36-month period and Bank B has a repayment of R890 over a 48-month period. At face value, you’re paying less with Bank B. But over the term of the contract, you are paying a lot more on the 48-month period,” says Mitchell.
He concludes that you should seek financial advice when you are not sure.
Article originally published on JustMoney