the difference between secured and unsecured credit.
In our last article, we had a look at the history of credit, as well as the different types of credit available in South Africa, with a special focus on the difference between secured and unsecured credit. When it comes to secured credit, given the security of an underlying asset that has value, the lender offers better interest rates on the debt and the debt is normally for a longer term. Typically, cars are paid off in 5 years and homes over 20 years. There are a range of factors that determine the terms of a loan. Banks and financial service providers have different criteria and requirements.
what do lenders look for when you apply for a loan?
When assessing your loan application, the lender is trying to gauge whether you’re a safe bet to loan money to. Generally, they will be interested in things such as: your employment and employment history, your net disposable income, your current debt repayment, whether you are an existing customer, a consumer risk profile and you will be evaluated through a credit score and an affordability assessment. These factors, as well as market-related factors will be determinants of your loan and the interest that you will have to pay. We will touch more on this in next week’s article.
what’s happening locally?
Some reports refer to South Africa as the world’s capital for borrowing. We are seen as a nation that collectively struggles to manage its credit. Fortunately, regulation in South Africa is shifting to protect the borrower. Regulation in South Africa has taken a hard-stance on P2P lending markets. Section 40 of the National Credit Amendment Act 19 of 2004 stipulates the specifications of who can be a credit provider. In 2014, the lending threshold was R500 000 and in 2016, this was changed to R0. In short, any person who intends on loaning money with a credit agreement, must register as a credit provider.
why do south africans struggle to manage their credit?
There is still a lot of work that needs to be done. There are some lenders extending credit to those who do not qualify for it and can’t afford to pay back their debt – known as reckless lending. For perspective, studies have found that almost 40% of borrowers have impaired credit records. This means that they’re struggling with their repayments. Almost 70% of the credit in South Africa is unsecured and relates to credit cards and store accounts. So, most of the debt in South Africa is at high interest rates. This makes it expensive for borrowers and many are unable to pay back their debt.
what about people who use credit responsibly?
There are hordes of borrowers who have used credit responsibly. They use credit to get themselves an education, start a business, get themselves through the month or pay for a medical emergency. The list goes on, but the takeaway is that credit can be used to your benefit when you manage it responsibly. Are you looking to apply for a personal loan to make your dreams a reality? You can get a personal loan through Virgin Money here.
The way that you manage your credit can influence the rest of your life and your ability to get other credit in the future. In later articles, we will share ways that you can manage your credit responsibly, such as: how to keep track of your spending, advice on making payments and tips and tricks to building a healthy credit history. However, the first step to managing your credit responsibly is to know your credit score. Knowing your credit score is part of responsible borrowing so you know what you can and can’t afford and also avoids lenders taking advantage of you by charging excessive interest rates. If you haven’t already, get a free credit score here and start borrowing responsibly.
Join us next week as we dig deeper into how lenders decide who to lend money to and how much.