How a personal loan works
A personal loan gives you one amount up front, which you repay in equal monthly instalments over an agreed term — usually somewhere between six months and six years. Each instalment covers part of the amount you borrowed and the interest on what is still outstanding, so the balance falls a little every month until it reaches zero on the last debit order.
Because the money is not tied to a specific purchase, nothing is used as security. The provider relies on your income and your history of repaying other credit. In the language of the National Credit Act this is an unsecured credit transaction, and that label decides which legal limits apply to it.
What the law lets a provider charge
The National Credit Act caps every part of the cost. For an unsecured loan the interest rate may be at most the Reserve Bank's repo rate plus 21% a year — 28.25% a year while the repo rate is 7.25%. When the repo rate moves, the cap moves with it, and so may the rate on a loan with a variable rate.
On top of interest, a provider may charge a once-off initiation fee of at most R165 plus 10% of the amount above R1 000, never more than R1 050, and a monthly service fee of at most R60. VAT may be added to the fees. Credit life insurance, if the provider requires it, has its own cap, and you may choose to take the cover from another insurer instead of the provider's.
These are ceilings, not prices. Two people borrowing the same amount on the same day can be offered very different rates, because the rate depends on how the provider rates the risk of each applicant. Our loan cost calculator shows the most a given amount and term may cost, which is a useful line to hold any offer against.
Why the term matters as much as the rate
Stretching a loan over more months lowers the instalment, which is why longer terms are easier to approve and easier to live with. It also raises the total you repay, because interest is charged for longer and the service fee is charged every month. Borrowing R20 000 over five years instead of two can add several thousand rand to the total even at the same rate.
A sensible way to choose is to start from the instalment you can carry comfortably after every other expense, including the months that are always tighter, and then pick the shortest term that fits it. If the shortest affordable term is very long, that is a sign to borrow less.
How providers decide
Every registered provider must run an affordability assessment before it lends. It looks at your gross and net income, your existing debt repayments and your living expenses, and it checks your credit record at one or more credit bureaus. Lending to someone who clearly cannot afford the repayments is reckless lending under the Act, and a court can suspend or set aside such an agreement.
In practice most providers ask for a South African ID, three months of bank statements or payslips, and proof of address. Some make a decision within hours; others take a few working days, particularly when they need documents. What they offer you may be less than you asked for: the amount follows from the assessment, not from the application form.
Reading an offer before you accept it
Before you sign, the provider must give you a pre-agreement statement and quotation that shows the amount, the term, the interest rate, every fee, the instalment and the total you will repay. Compare offers on that total and on the instalment together, never on the rate alone. A low rate with a long term and insurance added can cost more than a slightly higher rate over a shorter term.
Check whether the rate is fixed or linked to the repo rate, which day the debit order runs, and what happens if a payment bounces. If anything on the quotation is unclear, ask before you accept; once the agreement is signed, the figures on it are the ones that count.
Paying a loan off early
You may settle a personal loan at any time. You pay the outstanding balance, the interest up to the settlement date and any fees already due, and the provider must give you a settlement figure on request. For most loans of up to R250 000 there is no penalty for settling early, so extra payments when money allows go straight to reducing the cost.
Personal loan or a cheaper alternative?
A personal loan is not always the cheapest way to borrow. If you have a home loan with an access facility, money drawn from it usually costs far less per year, although it adds to a debt secured on your home. A credit card used for a short period and paid off in full within the interest-free days costs nothing in interest at all. And for buying a specific item, a store's instalment plan can be cheaper or dearer than a personal loan depending on its fees, so compare the totals.
If the purpose is to pay off other debts, a consolidation loan only helps when the new rate and fees are genuinely lower than what you pay now, and when you close the accounts you settle. Otherwise you end up with the new loan and the old accounts back in use within a year.
Comparing through RandScout
We ask four short questions — amount, income, employment and a few facts about your credit record — and match them against the rules each registered provider sets. You see only the providers that may be open to you, with the information each one publishes, and you apply on the provider's own site. Comparing here does not leave an enquiry on your credit record; the provider checks your record only once you apply with them.