Are you thinking of applying for a personal unsecured loan? Different South African lenders offer a wide range of loans, and the details can be somewhat confusing. We’ve broken it down for you in this article and make it easy to understand what unsecured personal loans are all about.
What exactly are unsecured personal loans?
The term “personal loans” is probably already familiar to you. A personal loan is like borrowing money from a financial institution such as a bank or credit union. You can use the money for anything, including paying for a wedding, university fees, and home improvements.
What does it mean when a personal loan is unsecured?
In South Africa, unsecured loans are popular and considered the best option for those seeking to build credit. This simply means that when you take out the personal loan, you do not need to pledge your valuable property as collateral. Therefore, you can apply for and receive the loan without securing it with your property (such as your house or car).
A personal loan that does not require collateral or security is known as an unsecured loan. A credit provider lends you money based on your affordability. As long as you seem responsible and have a stable income, you have a good chance of getting unsecured debt in South Africa.
How do unsecured personal loans work?
As mentioned above, with an unsecured loan, there is no need to use your property or assets as security. Therefore, if you fail to repay the loan, you won’t lose your property. However, unsecured loans are usually expensive because of their high-interest rates.
Lenders offer higher interest rates to boost their chances of getting their money back if you fail to repay the loan. Last but not least, unsecured loans may also have a limit on the amount you can borrow.
What do i need to apply for an unsecured loan
To determine your credit history, lenders require basic documentation for any loan. In other words, they don’t want to give money recklessly to irresponsible customers. In most cases, credit providers will need the following:
Before applying, you need to check if you qualify. General requirements include:
- South African ID;
- a minimum monthly income (depends on the lender);
- proof of income. (Usually, bank statements or payslips issued in the last 3 months);
- a good credit history; and
- minimum age of 18 years
Depending on the lender, they might require more documents in order to approve your unsecured loan. Having chosen a reputable and licensed finance company, you can log on to their website.
General overview of unsecured loans in South Africa:
- The lowest amount you can borrow: R1000
- The highest amount you can borrow: R350 000
- Loan term: You usually have between 1 month and 84 months (7 years) to repay the loan.
- Interest rate: The maximum interest rate for personal loans in South Africa is 27.5% per annum.
There are several types of unsecured loans, including personal loans, payday loans, and credit lines.
How to choose the best-unsecured loan for you
You might find it helpful to look at the following factors when you’re looking for an unsecured personal loan that suits your needs:
1. Interest rate
The rates for an unsecured loan may be higher, but there are still options for affordable loans. You also need to determine if you want to have a fixed or variable interest rate.
2. The amount of money you can borrow
In this case, there are two things to keep in mind. First, you need to decide on the amount you can afford to borrow. The next step is to find a loan that gives you the money you need.
3. Other costs associated with the loan
You can keep the total cost of your loan low by choosing a loan with a lower APR (Annual Percentage Rate). In addition to the interest rate, the APR includes other charges, such as service fees and initiation fees.
4. Additional features
In order to do this, you need to gather as much information as possible about your loan of interest. Depending on the loan, you may have to pay for credit protection that covers you if you die, lose your job, or become disabled. If you pay your loan off faster, another lender may charge you an additional fee.
When is the best time to apply for an unsecured loan?
A benefit of unsecured loans is that you can use the money for whatever you want, and you do not need to pledge your home or car. It is, however, wise not to take out a loan unless you really need it.
Don’t forget that borrowed money isn’t free. Interest must be paid on the loan. Even so, there are times when taking out a loan can be beneficial. The following are examples of reasonable times to apply for an unsecured loan:
1. When you have an emergency
There are many types of emergencies. You should never hesitate to borrow money when needed to cover a family or medical emergency.
2. When you want to buy essential items
Making your life easier may require you to regularly use something like this. Laptops, schoolbooks, and electronics are examples. Even after your car breaks down, you can use the money to fix it.
3. To pay for something that brings value to you
An important holiday or wedding could be planned. In most cases, they are expensive but worthwhile, and you may need some financial assistance to pay for them.
4. To invest in something that brings profit
You can use a personal loan to invest in something that will make you more money.
5. To consolidate debt
In order to consolidate debt, unsecured personal loans are a good option. You can use the money to pay off all your existing debt, leaving you with only one loan that is easier to manage.
Comparing secured and unsecured loans
The main differences between the two types of loans can be explained using the following points:
- A secured loan, such as a car or home loan, requires you to use your home or car as collateral. Unsecured loans, however, do not require such security.
- There is no risk of losing your property if you take out an unsecured loan. When you fail to repay a secured loan, you can take your house or car as collateral.
- The interest rates on unsecured loans are likely to be higher than those on secured loans.
- Unsecured loans may limit the amount of money you can borrow. The requirements for unsecured loans are stricter as well; for example, you may not be approved if your credit score is poor.
Advantages of unsecured personal loans
When you borrow wisely, you also weigh the pros and cons of the loan you intend to take out. The following are the main benefits of unsecured personal loans:
- Security is not required. Therefore, you won’t have to worry about losing your valuable assets.
- With an unsecured loan, you can use the money however you like.
- Applying for an unsecured personal loan is easy if you meet all requirements. Generally, the application process can be completed online by filling out an application form.
Disadvantages of unsecured personal loans
However, unsecured loans are also associated with the following disadvantages:
- Typically, they have higher interest rates.
- In some cases, you may not be able to borrow larger amounts.
- The loan may need to be repaid over a short period of time.
For individuals looking to build credit profiles, unsecured loans are the best option in South Africa. In South Africa, you have a good chance of obtaining unsecured debt if you have a stable income and seem responsible.