How to make your loan as affordable as possible

A quick guide to loan types in South Africa

Let’s face it, taking out loans to cover expenses is more costly than funding outgoings directly from your pocket. Interest rates and service fees make borrowing money a more expensive undertaking than covering costs outright. Unfortunately, sometimes borrowing is necessary.

When emergency and essential expenses arise, not all of us are in a position to shoulder the cost. From medical bills and boiler repair fees, to vehicle costs – there are many expenses which need to be covered quickly. If your “emergency fund” is at a low ebb, it might not be possible to pay for crucial services which allow you to stay up and running. Without a vehicle, for example, traveling to work in order to continue generating much-needed income may be impossible. With South Africans currently shouldering high costs of living, circumstances like this are not at all uncommon.

If you do find that you need to turn to a loan provider in order to fund an emergency expense, it is in your best interests (no pun intended) to do your homework. Different loan types and different loan providers will offer different interest rates, repayment plans, penalty fees and service charges, for example. Choosing carefully will ensure you make your loan as affordable as possible. Here are a few tips which will help cut the cost of personal loans:

  1. Borrow the smallest amount possible
    Ensure you only borrow what you can realistically afford. This is essential no matter what type of loan you are accessing. You can also reduce the cost of a loan by ensuring you borrow the smallest amount possible. The smaller your loan, the less interest you will pay – and the lower the risk of defaulting on repayments (which can add penalty fees and surcharges to your final loan payment).While minimising your loan amount can help reduce costs, it’s also important to ensure you do not take out too little, as this may mean you to seek another loan, with another set of administrative fees and service charges. Before taking out a loan, sit down and carefully budget in order to calculate exactly how much you need to borrow. You can use a loan calculator to get a general idea of costs.
  2. Choose a shorter loan period
    Shorter loans mean less time for interest to accrue. Choose a realistic timescale for loan repayment, but ensure you repay the amount as soon as possible to reduce the overall cost. If you can, choose a personal loan you can repay quickly in one lump sum (often after payday). This will typically be cheaper than a longer term, instalment loan you repay over time.
  3. Compare interest rates and service charges
    Interest rates and service charges can vary widely between personal loan providers. Do your research to ensure you’ve found the best available rates. There are lots of comparison tools available online, but be cautious when making use of these. Many such websites receive commission from loan providers, which may mean the results they calculate bias particular companies. Always double check rates and fees yourself to be sure you are getting the best deal.
  4. Read the fine print
    Look out for hidden extras before you apply for a loan. Some loan providers may charge for different elements of the lending process. Some providers may apply a surcharge if you repay your loan early, for example, while others do not apply early repayment fees.Lenders also have different responses to missed payments and customers who find themselves unable to repay their loan according to schedule. While you should never take on a loan you do not feel 100% confident of repaying, unexpected circumstances can arise. In such cases, it’s important to understand how your provider will respond. Read the small print to make sure your lender has fair procedures in place – and that you understand how the process works.

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