Your guide to long-term loans

A long-term personal loan can help you grow your finances. For example, if you want to expand your business, a long-term loan may be exactly what you’re looking for.

On the other hand, perhaps you have to attend to an emergency, such as an unexpected medical condition, or you have a once-in-a-lifetime event that you would like to fund, such as a wedding.

Whatever your reason for wanting a long-term loan, it’s important to understand how they work before you get one. Below, we dig deeper into everything you need to know about long-term loans.

A long-term loan is a sum of money you borrow from a lender and, unlike a short-term loan, it will take longer than a year to pay off. This is because the amount borrowed is often larger than R100,000, which will take longer to settle than a short-term loan, which is typically capped at R15,000.

If we assume your monthly instalment is R2,500, it will take you six months to settle R15,000 as a short-term loan, while it will take you 40 months to settle R100,000 with a long-term loan.

You’re allowed to spend your long-term loan on anything you choose because it’s an unsecured loan. In other words, it’s not connected to an asset, such as a car or home, so you can use it however you like.

The downside to this is that lenders consider long-term loans high risk because they won’t be able to claim an attached asset if you don’t pay your instalments. Therefore, you will pay a slightly higher interest rate than you would on a secured loan.

Since long-term loans have a longer repayment term, they often have a slightly lower interest rate compared to short-term loans. However, it’s up to the lender to decide what kind of interest rate they will offer you. This usually depends on your credit profile and affordability.

The National Credit Act, which came into effect in 2005, enforces boundaries to protect both consumers and lenders. Here, it states that lenders cannot charge an interest rate of more than 21% plus the current repo rate for long-term loans.

You will also have to pay service fees. The Act states that lenders cannot charge you more than R165 plus 10% for a loan that’s more than R1,000, and it’s capped at a maximum of R1,050.

Taking out a long-term loan is a big responsibility because it will reduce your monthly income for more than a year. Before you decide to make this commitment, you need to be aware of the risks and how you can overcome them to protect yourself:

• Prepare for a lower income: If you’re interested in a long-term loan, make sure you can cover your other expenses with your remaining income before you start paying your instalments. It’s also good to have an emergency fund that contains three months’ expenses. This will help you cover unexpected costs that your reduced income may struggle to meet.

• Stick to your repayments: Taking out a long-term loan will lead to an enquiry on your credit report, which will slightly reduce your credit score. Thereafter, if you don’t stick to your credit agreement, it may go down even more. Make sure you honour your monthly instalments so that your credit score will grow over the long term rather than decline.

When you apply for a long-term loan, lenders are most concerned about whether you will be able to repay the amount you borrow. This is why your credit score is one of the most important factors when you apply for a long-term loan. It tells lenders whether you have a good or bad history with credit.

On top of this, you will also have to confirm your identity, be at least 18 years old, and demonstrate that you have a stable income. You can do this by submitting identity documentation, such as your ID booklet or smart card, and bank statements or payslips – depending on what your lender requests.

There are so many different lenders in South Africa that it may be difficult to determine which one you should apply through. When you’re comparing your options, you should look at the following:

• The package they’re willing to offer you: Every lender processes applications differently. This means that you will receive different repayment periods and interest rates depending on the lender you choose. You can get in touch with your shortlisted lenders for an estimation. However, don’t submit more than one application because it will result in too many enquiries – learn more about this here.

• The fine print in credit agreements: If you decide to use your annual bonus to settle the remainder of your long-term loan, then you may have to pay a small penalty. Before you select a lender, find out more about their terms and conditions, such as their early settlement fees.

• The reviews about their customer service: Make sure you research lenders thoroughly, and pay special attention to whether they offer decent customer service. If they do, you will be able to rest assured that any issues you have will be promptly addressed and resolved.

When you apply for a long-term loan, you will have to undergo a similar (if not the same) process as you would to apply for a short-term loan. In its most basic form, there are the steps you will take:

1. Determine your affordability: Find out how much money you have left after your general expenses each month. For example, if your income is R20,000 and your expenses are R15,000, then you will have R5,000 left to assign towards monthly instalments.

2. Select your preferred lender: After comparing your options, you will be able to make an informed decision about which lender suits you best. If you’re having trouble deciding, you can easily compare loans on ClearScore that already match your credit profile.

3. Complete their application process: Nowadays, you can complete an application form online, and get results quickly. Each lender will have different criteria, but the majority will request documentation, such as proof of income and identification.

4. Receive the outcome: After assessing your application, your preferred lender will let you know whether it was successful or not. If it was, you will receive a credit agreement and, thereafter, the funds will be transferred to you.

Although it will strengthen your application, you don’t need a perfect credit score to be approved for a loan. Some lenders are willing to take on more risk and they’re happy to accept borrowers who have a lower credit score.

However, be cautious not to fall victim to loan sharks. If a lender says that they will give you a loan without doing a credit check, you should consider this a warning sign and take your business elsewhere.

If you’re interested in taking out a long-term loan, then this article explains everything you need to know to successfully receive the funds you need. However, even if you’re not looking for a long-term loan right now, it’s good to prepare your credit profile in case you need it one day.