Many South Africans consider taking out a personal loan when they need extra cash for an unforeseen expense, such as replacing an appliance, fixing a car or medical treatment. Using credit properly is a responsible way of getting money for emergencies or a large item that will add value to your life, says Old Mutual Finance.

The main benefits of personal loans are that they are convenient and can be paid off with instalments that suit your pocket, says Jan Moganwa, CEO of Old Mutual Finance. 

Personal loans also don’t require security, and once an application has been made, checked and approved, payment is quick and straightforward. 

“The rule for taking out a personal loan is simple; never act hastily, don’t take out a loan for something you want instead of need, and have years of repayments ahead of you. A simple example would be borrowing money for a luxury holiday and then finding out that the holiday’s memories have faded long before the payments are done.”

Where should you apply for a loan?

A company such as Old Mutual will thoroughly check your finances before granting a loan. People or institutions that approve loans quickly with few checks usually don’t have a borrower’s welfare in mind and charge much higher interest rates.

“It’s difficult to accept when a reputable financial institution turns down an application. However, a trustworthy lender turning down an application could be a warning that you really can’t afford the loan because you already have too many debts,” says Moganwa.

How much should you borrow?

Borrowing depends on your budget. Old Mutual suggests that you work out your debt-to-income ratio before deciding how much to borrow.  It’s not as complicated as it sounds. All it requires is that you do the following:

• add up your monthly payments, including credit cards and loans.
• Divide your total monthly payments by total monthly income.
• Multiply the result by 100 (to get a final percentage).
• For example, if you spend R2,000 a month on debt and have a total income of R6,000 a month, your debt-to-income ratio would be 33%. (R2,000 (debt) ÷ 6,000 (total income) x 100 = 33.3%

The lower this ratio is, the better your finances are, and the more you can borrow.

How should you decide on a repayment term?

Deciding on the term to repay your debt depends on what’s needed and the levels of monthly payments. 

“The longer it takes to pay off a loan, the more interest is payable. Sometimes, however, to be safe, people will decide on a longer repayment period, so instalments are lower. If things go well, the loan can then be paid off ahead of time.”

“The key to borrowing is being comfortable with the amount you are borrowing. If you apply for a loan and are worried about its impact on your income, this is probably a signal that you should think some more before taking on the responsibility,” says Moganwa.

What are credit scores?

A credit score determines whether a lender regards you as a good risk. The better your credit score, the more likely that you will get a loan and even qualify for a lower interest rate. 

A credit score is calculated by a credit report that includes information on your accounts, payment history, any negative behaviour (including judgments for debt), public records and inquiries made about your creditworthiness.

An Old Mutual branch will provide a free copy of your credit report and discuss your loan application with you.  

Check whether your good repayment record is rewarded

If you ensure every instalment due on a loan is paid in full and on time, Old Mutual believes you should be rewarded for being an excellent customer. As part of its rewards programme, up to 5% of every instalment is paid back in rewards. A full schedule of requirements and levels of rewards paid is available when joining the Old Mutual Rewards programme.

“Old Mutual is committed to responsible lending. We believe we must make sure our customers understand the terms and conditions of their loans. We encourage our customers to read loan agreements to avoid misunderstandings. These actions drive our belief that a personal loan should be helping people advance their lives, not just increasing their debt,” says Moganwa.

Old Mutual Finance is a licensed financial services and registered credit provider NCRCP 35.

Old Mutual Rewards (Pty) Ltd is a company in the Old Mutual Group. 

This article was paid for by Old Mutual Finance.