By Mzukona Mantshontsho
When taking out a loan with your bank it is important to understand in detail exactly what will be required of you.
From a distance all the terms can look confusing or difficult to understand, but this need not be the case. Here are a few important things to understand about taking out a loan. One of the most important aspects to understand about your loan is its interest rate.
An interest rate is the cost you pay for borrowing money. It is calculated by the bank according to your personal risk profile and the current prime lending rate, which is determined by the South African Reserve Bank (SARB). This means that the interest you pay on a loan will be dependent, on amongst other things, your spending patterns and behaviour.
The total amount you pay on interest and other fees paid on your loan will be dependent on the amount of time you take to pay it off, which makes it important to pay extra on your instalments when you can and settle it as quickly as possible.
In understanding your interest rate, you should keep in mind that different types of loans will have a different rate. It will also vary depending on your individual profile which makes it worthwhile to approach your bank early on in the process to get a personal assessment. This makes it important to examine the different interest rates which will assist you in taking out the best loan for what you need.
Other costs associated with loans in addition to paying interest are service fees, which are paid monthly and initiation fees, which can be paid once off, or charged over the lifetime of your loan. The initiation fee is the fee the bank charges to open up the loan, while service fees allow the bank to carry out admin related to your loan on a monthly basis such as providing statements. When taking out a loan with a registered financial services provider, you will also be required to take out insurance to cover you against an unforeseen event arising.
You will be offered insurance with your loan at a specified premium which will be added to your monthly repayments. If you choose not to take the insurance that the bank offers, you must supply proof to the institution from whom you are loaning money that you have a policy in place which offers you suitable cover for the bank, and should the need arise, your loan will be covered.
Insurance becomes particularly helpful when you are unable to pay your loan due to death, temporary or permanent disability or retrenchments. However, don’t take it for granted that you will be covered for all of these. Read through the Terms and Conditions of your insurance contract, so that you understand what you are covered for in more detail.
Make sure you also understand what the repercussions of skipping payments will be on your insurance. The Terms and Conditions should state this clearly. Some policies may be very strict and discontinue your cover if you miss one payment, while others may be more lenient with the number of payments you can miss. If you are unable to pay an installment for whatever reason, make sure that you contact your bank for assistance immediately.
Understanding the type of loan, you have applied for is also important as its terms may vary. Make time to make yourself aware of the conditions of such a loan. Reading and understanding the terms and conditions of your loan and your insurance is absolutely vital before entering into any loan agreement. Ask as many questions as you need to and never allow yourself to be put under any pressure to sign your contract until you are clear and understand what it means. This will help you avoid unnecessary surprises at a later stage.
