Three most common types of unsecured credit
There are literally hundreds of loan products available and it can often become quite confusing to choose the right product. As an example, very few people know that there is a difference in interest rates between credit cards and personal loans. This sector (often referred to as unsecured lending) is divided up into 3 main categories and they are listed below with examples of each.
Unsecured Credit Facilities
Are facilities that can be used over and over, obviously if the payments are made each time. Examples of these types of products are Credit Cards, Store Cards, Overdrafts and Revolving Credit Plans. They usually have the lowest interest rate of the unsecured credit products. The maximum amount of interest Credit providers may charge on these
agreements is the current Repo Rate plus 14%. The cost of credit on these agreements is often further reduced because only one initiation fee is charged at inception of the loan.
Unsecured Credit Transactions
Are products like personal loans. The full loan amount is given to the consumer and the payments are typically fixed for the period of the loan. Once the loan is repaid, one would need to reapply for the loan incurring new initiation fees and charges. The maximum interest rate applicable to these agreements is capped at the current Repo Rate plus 21%.
What adds to the cost of credit is that initiation fees are charged each time the loan is taken, so unlike a credit card with a budget facility that can be extended to a year, and then reused for a new transaction, this loan would automatically be closed at the end of the repayment period.
Short term credit Transactions
Are loans of less than R8000 over a period no longer than 6 months. These are often called payday loans and is by far the most expensive form of credit. Consumers who make use of these products often don’t realize that the approximately 20% cost of credit is charged per month, and therefore should be compared to products like credit cards that charge
“>similar interest rates over a year.
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What is loan consolidation?
Loan Consolidation is a process by which you take all your existing credit agreements and roll them into one loan. In order to reduce the total monthly payment, consumers often stretch it out over the longest period possible, typically 5 years or 60months.
One should take not of the fact that one is usually therefore swopping certain existing credit facilities like Credit Cards and overdrafts for a higher interest rate loan. Consolidation loans are therefore usually granted after the maximum credit facilities have been taken up, with affordability being the most common factor for declines. It is also very important to remember that the Credit Facilities, like credit cards and overdrafts, aren’t automatically closed when one transfers the payment received from the consolidation loan. Fees and account charges can easily keep the account active.
It is imperative that the consumer closes any accounts they are not using to avoid unnecessary debits. Download our eBook which contains valuable information on credit score.
Our Free Workshops
We currently do talks around financial wellness to the staff of financial institutions like ABSA and Nedbank, but also do employee financial wellness workplace talks at many other companies like Shell, Freddy Hirsch, Woolworths and Multichoice.
The reason for this is usually pretty clear to HR & Payroll departments who often have also felt the debt burden of employees in the sense that these employees sometimes borrow money from fellow workers creating friction in the workplace.
They might also try to take on extra jobs on weekends or after hours in an attempt to make ends meet, and therefore come to work tired. At some companies’ employees try to cash in their pensions to pay off unsecured debt, or borrow against it, thereby negating the good advantage the company had in the marketplace by offering the pension in the first place. When creditors are ignored, it sometimes even leads to garnishee orders that impacts on the payroll department. Many companies in Financial services cannot employ staff with impaired credit records as staff cannot then retain things like FAIS accreditation which is one of the main reasons ABSA and Nedbank invite us to speak so regularly.
Minimum and Maximum period for repayment
Personal loans typically have a repayment period of between 2 and 5 years. This calculation is based on a repayment period of 5 years (60 months). Credit Life Insurance has been added in this calculation. Monthly account fee of R60 (excluding VAT) and an Annual Interest Rate of 28% (or current Bank Repurchase Rate plus 21%). This calculation is a no obligation, free assessment and is intended to provide you with the information you need for comparison purposes only. For shorter timeframes, credit facilities (like Credit Cards and Revolving Loans) are more suitable products to use.
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Benefits of Financial Wellness
Your Credit Score and your Credit Report are very important to your financial wellness and can have a huge influence on your life. As an example, someone with a better credit score might easily pay R 20 000 less in interest and fees for a very standard entry level new car purchase over the period of the loan. In the same way one percent difference in interest on a home loan can change the cost of credit for an average home by R100 000.
Want to calculate the repayments on your loan quickly and easily? Use this Loan Calculator to work out how much interest you will pay. Calculate the cost of credit over the lifetime of the loan. Work out how much your balance will reduce with each payment.
Remove negative information from your credit report for free
Blacklisting as it is often referred to, which is just a term for all the negative information uploaded to your credit report can easily be removed. With the amendments to the National Credit Act that were implemented at the beginning of 2016, consumers now have the right to remove any negative information from their credit reports, provided the accounts are paid up and settled. As an example, if there is a judgement listed on one’s credit profile, and the consumer can show that it has been settled in full, a simple dispute form can be completed to remove the judgement from the relevant Credit Bureaus.
There are 12 registered Credit Bureaus in South Africa, and the main four are listed below. It is important to note which Credit Bureaus has the listing so that one completes the correct form. Their websites listed below. www.transunion.co.za www.experian.co.za www.compuscan.co.za www.xds.co.za
Check your credit report annually and report any incorrect listings.
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