Personal loans explained

Perhaps you need a loan to help you with some financial obligations, but aren't sure which type of loan is best for you.

What is a personal loan and how it works

Personal loans, also known as unsecured loans, are loans that you take out with a bank or lender that is not secured against any asset, for example your house.

Head of unsecured lending at Standard Bank Theunis Kruger said: "Personal loans are generally unsecured loans offered by banks or other lenders. They are used for various purposes such as paying school fees to funding home renovations. The interest rates are generally higher on personal loans in comparison to secured loans, such as vehicle finance. Personal loans are ideally suited for individuals that want instant access to money."

Corne Jordaan, head of credit FNB loans, adds: "A personal loan is an unsecured loan applied for by a customer who needs access to funds that they do not have, in order to cover personal expenses. The loan is paid back to the financial service provider over a certain period of time with interest and fees based on an agreement between the two parties."

There are many financial institutions that offer personal loans.

Seven financial service providers the terms of their personal loans:

1. Standard Bank

The personal loan from Standard Bank is available to South African citizens between the ages of 18 and 65, as long as they meet certain criteria.

To qualify for a personal loan, you need to be formally employed and have a bank account with a debt order facility. You must also have a consistent income of at least R3 000 per month before deductions. When applying you need to bring along your South African ID book.

According to the Standard Bank website, this personal loan option offers many benefits to customers:

Competitive interest rates,
Fixed minimum monthly repayments,
Hassle-free applications as you can apply online,
The money is transferred directly into your transactional account,
There are no termination fees if you pay the loan off early,
You get credit life insurance that will pay off your loan in the case of natural or accidental, death, permanent or temporary disability or retrenchment,
There are a variety of loan options to meet your personalised needs, and
If you are a UCount Rewards Member you could increase your rewards tier by taking up a personal loan.

However, Kruger explained that before getting a personal loan, you need to be screened by the bank for a credit risk, and affordability assessment.

"This is done by assessing your bureau profile and Standard Bank accounts to determine the behaviour on existing credit accounts. It is therefore important to manage your accounts well and make payments on time. Customers should also understand their credit rating as provided by the credit bureaus as this will impact on the decision to approve the loan," explained Kruger.

When applying for a loan, Kruger points out that customers will be required to disclose their income and expenses, as this information is needed to conduct an affordability assessment.

"You can get a response for your loan application within 20 minutes," states Kruger.

Customers have between 12 and 72 months to repay the loan. "If a person is unable to pay their loan, they can speak to their bank or lender and make special arrangements. Each arrangement is unique to that specific customer's financial situation. If the customer is still unable to pay back the loan after arrangements have been made, the customer will be listed on bureau as a defaulting customer," said Kruger.

The maximum amount a person can take out from Standard Bank is R300 000

Further reading:

2. Nedbank

To apply for a Nedbank personal loan you must be permanently employed or employed under contract. Nedbank does not offer personal loans to people who are self-employed. You also have to earn a minimum of R2 000 a month, which is electronically deposited into your bank account.

There are several ways to apply for a Nedbank personal loan. You can apply online, via the phone at 0860 103 582, or go into a Nedbank branch.

When you apply, the bank will assess your credit record to see if you qualify for a loan. Once the loan has been granted, Nedbank will pay the money directly into your bank account.

Nedbank offers flexible loan repayment periods. You have the choice of 12, 24, 26, 48 or 60 months in which to repay your loan.

When applying for a personal loan you will need to present the following documentation:

At least one month's bank statement,
Your most recent payslip, or payslips if paid weekly,
Your South African ID book, and
Proof of residence (this is required for the Financial Intelligence Centre Act (FICA))

Each loan is assessed on an individual basis according to your situation and credit record, which may result in additional documentation being required.

If further documents are needed, the person processing your loan at Nedbank will inform you what else in needed.

Nedbank offers personal loans from R1 000 to R120 000.

3. Absa

The personal loan from Absa allows customers to borrow amounts from R3 000 to R150 000, with repayment periods ranging from 12 to 72 months.

According to the Absa website, when you apply for a personal loan, you get many benefits. These include immediate access to the money when the loan has been approved, as well as competitive interest rates, and easy approval if you require additional funds.

Absa also offers customers the option to pay off the loan faster, by either pay more in monthly repayments each month or by making extra payments. This will reduce the capital amount of the loan.

For non-Absa clients, you can apply online by completing a form, or you can go into an Absa branch. For existing Absa clients, you can logon to Absa Online, click on 'apply' and select 'personal loan'. You enter your loan requirements and within 10 minutes you can have feedback from the bank.

The Absa website states that when you apply for a personal loan you don't need to provide any collateral, as approval or denial of your loan application is based on your credit record.

4. First National Bank (FNB)

Jordaan said: "In order to apply for a personal loan at FNB, current and potential customers can apply using one of the following FNB channels: Online, Mobi, Cellphone Banking, ATM or the Call centre on 0860 100 762."

When applying for a personal loan with FNB, customers will be required to submit the following documentation:

A valid Green bar coded South African ID or Smart Card,
One month's payslip / 4 monthly payslip (if paid fortnightly or weekly),
Three month's bank statement for non-FNB customers,
Six months bank statements if self-employed, and
Proof of residence

Once the bank has all the relevant documentation, it will "then assess whether the customer qualifies for credit and their affordability in order to establish what amount will be awarded. Once the loan agreement has been signed the money will be paid into the account as stipulated by the customer," explains Jordaan.

Customers will receive immediate response on whether or not their loan application has been approved. If the loan has been approved, customers have between three and 60 months to repay it. The repayment terms are calculated according to the loan amount and the customer's affordability.

"If a personal loan is taken out and it cannot be serviced the customer runs the risk of falling short on monthly minimum repayments resulting in a bad credit record, possibly being black listed and it can impact their ability to obtain credit in future. Individuals who are experiencing financial difficulties are urged to contact their bank so that arrangements can be put in place. Should arrangements not be made or kept, the bank can use all the methods allowed under law to recover the money, which includes legal action," explains Jordaan.

To qualify for a personal loan from FNB customers need to meet the following requirements:

You must be 18 years or older,
You must be a permanent resident of South Africa,
You must be permanently or self-employed, and
Your salary must be paid directly into your bank account

FNB offer personal loans between R1 000 and R150 000.

5. Capitec Bank

Capitec Bank offers personal loans up to R200 000 over a period of 84 months. Your loan approval is based on your affordability and your credit profile.

Once your personal loan has been approved, the money is immediately available in your transaction or savings account. The Capitec Bank personal loan includes free retrenchment and death cover, as well as fixed monthly repayments.

The free retrenchment and death cover will pay the outstanding balance on loans that are six months or longer if you are retrenched or the holder of the loan dies. If you are retrenched within three months of getting the loan, 50% of the loan will be covered.

To apply for a Capitec personal loan you need to have the following documentation:

A South African ID book,
Original proof of residential address,
Your latest payslip (if you are self-employed you do not qualify for a personal loan from Capitec Bank), and
Three months' bank statements

6. Ubank

The Ubank personal loan is designed around a person's individual needs. The bank offers personal loans up to R80 000, with repayment options ranging from one to 60 months. The interest charged on your personal loan will be based on your credit profile, and therefore may differ for each person.

To apply for a personal loan from Ubank, you can either go into a branch or phone the bank's contact centre on 0860 008 322. To qualify you need to earn a salary, have a bank account and be between the ages of 18 and 65.

Once your personal loan has been approved, the funds will be immediately available in your bank account.

When applying you need to provide the following documentation:

A South African ID book or passport,
Your latest original salary,
Proof of physical address not older than three months,
Your banking details,
A copy of your last three months' bank statements for non-Ubank customers,
A contact number for you, as well as for a relative,
A list of your expenses, and
If you are married in community of property the bank will need written consent from your spouse

Personal Loan Tips

Personal loans are taken out for a variety of different reasons, for example to pay for your studies or school fees, or for home renovations. They are also useful in assisting with unforeseen expenses, such as to pay medical bills or funeral expenses.

However, before taking out a loan, make sure it is the best route for you, and that there is not another alternative.

Jordaan advises: "Only borrow what you need. Use your pay date as your payment date to manage your accounts seamlessly. Make additional payments where you can to reduce the interest charged on your loan account and notify the bank immediately if your circumstances change and can no longer make payments on your loan account."