How to find the best personal loan for you

Personal loans are not created equal, and the loan amount, while important, is not the only criterion you should consider.

We investigate the features and specifics that will help you choose the best loan provider for your needs.

Tip: In need of funds for an emergency? Find out if you qualify for a personal loan here.

Establishing your unique needs

Amika Maharaj, head of business solutions at FNB Loans, says that, as an initial step, it's important to distinguish between a once-off need for a personal loan, and a recurring need.

"A once-off need can include, for example, paying for a burst geyser or consolidating credit. A recurring need may include funds for school fees, medical bills, or vehicle expenses.

"Once you understand what you need, you can consider the solutions that best match it," says Maharaj.

Ans Gerber, head of data insights at Experian South Africa, notes that it's worth carefully considering whether a loan can be avoided altogether.

"Taking out a personal loan is a big financial decision, as you will add a new, fixed, monthly payment to your expenses.

Comparing products and considering the charges

Personal loans can vary widely in terms of the repayment schedule, interest rate, and qualification process. Gerber suggests looking at options offered by your current bank and other reputable financial services providers.

"Many lenders allow you to see whether you prequalify via information submitted online. This can save you time and help you to focus on companies that are a good fit for your needs. Others may require you to complete a full loan application,” Gerber says.

She warns that submitting loan applications to more than one lender results in credit bureaus receiving multiple requests to view your credit report, which could affect your credit score negatively. For this reason, it’s important to avoid making too many applications.

Maharaj says loan aggregator websites can give you an estimate of what you may qualify for, but it's important to remember that not all loan suppliers participate on these sites. 

Another handy facility is the pre-qualification service that some suppliers offer to existing customers.

“If you bank, for instance, with FNB, and you deposit your salary into your account, you will receive pre-approved credit across various products,” Maharaj says. “You can access these offers at any time via the ‘My offers’ icon on the FNB app, without impacting your credit profile.”

When comparing offers, Gerber says, it’s important to consider the interest rate, monthly payment amount, repayment period, setup fees and late payment penalties, before making your final choice.

You should also consider the loan term. The shorter the term of the loan, the lower the total interest you will pay – although this will lead to higher monthly instalments.

According to Andre Keller, chief executive officer at Old Mutual Finance, if you can’t afford to take a shorter-term loan, you should consider making additional payments, which will reduce the term and save interest.

“You must be allowed to settle or repay a loan early,” Keller notes. “A loan that locks you into a fixed repayment period is illegal in terms of the national credit act.”

Determining the cost

When determining the total cost of a loan, you need to consider the interest rate and the term of a loan, notes Keller, along with the fees that the credit provider charges, such as the monthly administration fee.

The interest rate will depend largely on your credit profile. The higher the risk that you will default on a loan, the higher your interest rate will be. The best way to get a low interest rate is to improve your credit score by honouring your financial commitments, or, in the event that you risk missing a payment, engaging with your credit providers early.

Knowing what to look for when you receive a quotation

Maharaj says that when you apply for a personal loan, a good credit provider will supply you with a quotation that includes the following information:

• Loan amount. This is the amount that you will borrow. Ensure you only apply for, and accept, what you need. Don't overextend yourself.
• Instalment payable. This includes your repayment schedule - for instance, weekly or monthly - and the amount, which will include interest, fees, and potentially, credit insurance. Your repayment date should align with your salary payment. Failure to pay your instalment on time negatively affects your credit profile and may affect your chance of getting a loan in future.
• Service and initiation fees. These fees are regulated by the national credit act, and credit providers are not allowed to charge you more than the act prescribes. If you have loans with more than one credit provider, you can save on fees by consolidating them into one loan and paying only one service fee per month.
• Credit life insurance. Where your loan provider requires that you take out insurance to cover your repayments, the premiums or costs associated with this insurance should be shown on your quote. Take note of what is covered so that, in the event of something unforeseen, such as death, disability, or your inability to earn an income, you or your beneficiaries can claim from this insurance. Also note that you may choose another insurance provider if you wish, as long as the level of cover is the same as what your loan provider has offered.
• Number of instalments. The number of repayments you will make over the term of the loan should be included in the quote. If possible, deposit extra funds into your loan account to reduce the number of instalments. This will decrease your interest charges and allow you to repay your loan in a shorter time.
• Interest rate. The NCA regulates the maximum interest rate that a credit provider may charge. Some credit providers charge all customers the same interest rate, while others offer a personalised interest rate. It’s important to know your interest rate and understand whether it’s personalised, and whether the interest rate is monthly or annual.

Taking out a personal loan requires careful thought and understanding of your financial risk profile, Gerber says. Regularly checking and monitoring your credit report will help you to identify the best time to apply, and the steps you can take to improve your credit score before applying for new credit. 

Tip: A good credit score matters when you apply for a personal loan.