What to consider before taking a personal loan

FamCast News
24 days ago

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Are you thinking of taking a new loan or redrawing on your existing one? While not all debt is bad and can be used to finance dreams like buying a house, car or paying tuition fees; debt can become a trap if not managed well.

This article discusses key factors to consider before accepting a loan offer and signing on the dotted line.

# Cost of borrowing

Personal loans unlike other loans are unsecured, where the credit provider does not take any security or collateral to secure the loan. As such, the interest rate charged on the loan is very high, thus increasing the cost of borrowing. Table 1 below provides a summary of how much you would pay back if you took a personal loan of LSL100 000 at 23% as an example.

Table 1: Loan plus interest

Personal loan amountLSL100 000
Period72 months (6 years)
Interest rate (per annum)23%
Monthly paymentLSL2 572.31
Loan + interestLSL185 206.39

*Disclaimer: Table used for illustration purposes.

It is important therefore, to ask how much interest is charged on the loan before accepting the offer, remembering that the higher the interest rate, the higher the cost of borrowing.

# Affordability

Access to finance has become easier and convenient where credit providers offer pre-approved loans at a click of a button. As tempting as the offer may be, a question to ask yourself is ‘can I still afford the monthly payment should things change, for example interest rate increase, loss of income or retrenchment?’

Determine your affordability and avoid taking the maximum loan amount, to leave room should there be increases in the monthly payment.

“Debt is like any other trap, easy enough to get into, but hard enough to get out of.” – Henry Wheeler Shaw

# Credit life insurance

The credit life insurance premium which insures the loan should you pass away or be retrenched is another important consideration. This premium, which is paid monthly, and forms part of your instalment has a direct impact on your budget and thus affordability. Factor the premium into your budget, ask relevant questions about what the policy covers and read the terms and conditions.

Like Henry W. Shaw wrote, “Debt is like any other trap, easy enough to get into, but hard enough to get out of.” Do not become a victim of high indebtedness because you did not take all these factors into consideration. Likhomo!

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