Publish Date: 09/07/2018
Understanding how personal loans work has its financial benefits. Conversely, if you’re not clear about what a personal loan is or how it works before you sign up, it could be a path to financial hardship. Consider this the ultimate beginners guide to short-term personal loan, secured and unsecured personal loans.
There are a few moving pieces to personal loans that merit some basic explanations. What is a personal loan? How does it work? What is the interest rate offered? What are the different types of loans available and when should you use one? The answers to these questions will aid your understanding of personal loans.
A personal loan is when a person or an organisation, such as a bank (check out African Bank’s Personal Loan offering), lends you a lump sum of money for a small cost (stated in a percentage interest rate). In other words, a personal loan is when a consumer purchases a lump sum of money to make a purchase.
For example, John wishes to do some basic home renovations, but doesn’t have R10 000 saved up to do so. So, he goes and secures a short term personal loan of R10 000 from the bank at the cost of paying back the full amount plus interest over an agreed period of time. The percentage interest is the cost that the bank charges for providing John with the lump sum.
The term “personal loan” is generic for any type of loan taken out by a consumer. Personal loans are categorised into two different sub-categories, namely secured loans and unsecured loans.
A secured personal loan requires a piece of collateral as a form of security in the event that the loan can’t be repaid. In the example above, John takes out a secured loan where an item of considerable value is considered collateral for the R10 000 personal loan. This is an example of a secured loan.
Other types of secured loans include:
Unsecured personal loans don’t require collateral. Unsecured loans use the consumer’s financial reputation and credit score as proof that the consumer has the financial ability to repay the loan.
A consumer may request an unsecured personal loan from a bank for reasons such as:
Personal loans, whether secured or unsecured, have agreed terms set by the money lenders (financial institutions). These terms state the loan repayment amounts, how often these need to be paid and the length of time before the loan is paid back in full. The loan terms also state the interest rates, or cost of the loan, that will be charged.
When taking out a personal loan, keep in mind the following tips:
Now you can consider yourself a seasoned expert in the basics of personal loans. Understanding personal loans isn’t rocket science but, as you can see, it helps to know the basics.
About African Bank
Our mission is to be a successful Retail Bank offering a wide range of products and services to the consumers of South Africa. The people who work for African Bank represent the diverse population of South Africa; therefore we are a reflection of you, of all South Africans. We seek to provide value - more than our consumers expect of us. We promise to live our purpose 'humanity through banking' in all that we do and we are confident that we can, because 'We are You'.