Topics, Tips & Tools / Personal Finance

Personal Loans 101: Everything You Need to Know

05 August 2016

Everyone can use financial assistance from time to time. Whether it’s to make a large purchase, renovate your home, pay off debt, or go on that dream holiday, some extra cash can make a big difference in your life.

One way to get that extra cash is a personal loan.

Personal loans provide a means for people to access cash for whatever they need, whenever they need it. The process is simple and convenient, and you can have money in your account in a few days. If you’re not familiar with personal loans you may have some questions:


·         How do you get a personal loan?

·         What can you use personal loans for?

·         How much can you borrow?

·         Is it good or bad to get a personal loan?

We’ll answer those questions and more, and help you decide if a personal loan is for you.


A personal loan is an amount of money that you borrow from a lender and must pay back with interest over a period of time. You can use the money at your discretion.


Unlike other types of loans—such as car loans, student loans, or home loans—you can use a personal loan for whatever you want. As the borrower, you specify why you need the loan, but this doesn’t have any significance on whether you’ll be granted a loan or not.

People take out personal loans for many reasons. You can use one for a large purchase, such as a car, or you can use a personal loan to cover expenses, such as education costs, medical bills, or to consolidate debt. It’s even possible to use a personal loan for a vacation or your wedding. It’s up to you!


Though local banks are the traditional route for all types of loans, they aren’t the only option. There are several online lenders to choose from, which gives you more options for seeking the best loan.

Online loan companies offer a variety of personal loans, including debt consolidation loans.

You can find out if you qualify for a loan by applying online, over the phone, at a branch or via SMS with some institutions.

Make sure you don’t fill out too many online loan applications, as the frequency of credit checks can impact your credit score. In addition, before applying, research the company to make sure it is reputable.


There are two categories of personal loans: secured and unsecured.

Secured loans require the borrower to put up collateral, which is something pledged as security for repayment of the loan if they are in default. Though typically you use the item you purchase as collateral, such as a house or car, personal loans aren’t tied to a specific purchase.

Collateral for personal loans can be car equity or home equity.

Unsecured loans do not require collateral, so the lender doesn’t have anything to repossess if it’s not paid. Therefore, the lender will base the decision to award you a loan on your creditworthiness.

Unsecured loan amounts are based primarily on income and other qualifying factors that determine whether or not you can afford the loan.


Interest rates vary depending on the type of loan you get and where you get it. Typically, secured loans have lower interest rates than unsecured loans because the lender has some protection with the collateral you provide.

Interest rates can be fixed or variable.

Fixed Rates

Fixed interest loans have rates that stay the same the entire term of the loan. Regardless what happens in the economy during the term of your loan, your interest rate will not be affected.

Fixed rates are good if you want to know exactly what each of your payments will be so you can properly budget. If interest rates are expected to rise, you may want to lock in a fixed rate loan.

Variable Rates

Variable interest loans have rates that change as the prevailing market rate changes over the term of your loan. Though variable rate loans tend to have a lower interest rate, because they can be adjusted your loan payments could increase.


The term of a loan is the time in which you have to pay the loan back.

The duration of a personal loan contract depends on the lending institution, the amount you borrow, your financial standing, as well as your preference for repayment.

There are some lenders who offer loans that you pay back in as little as one to six months, while others offer up to six-year terms. Repayments are usually made on a monthly basis.

The longer the loan, the lower the monthly repayments will be, but remember, you’ll be charged interest over a longer period of time.


Another type of personal loan to consider is a consolidation loan, commonly known as a debt consolidation loan. This type of loan allows you to combine many of your existing accounts/debts into one manageable loan.

Consolidation loans are good for people who have a significant amount of debt or many smaller debts such as credit cards, store cards and short-term loans. Some key benefits include:

·         Easier budgeting

·         Fixed interest rates

·         Lower monthly payments

·         Improved cash flow

Easier Budgeting

When you consolidate your debts into one loan, you settle your outstanding accounts with other creditors in one lump sum.

Instead of having to keep track of several payments with different interest rates and different payment terms and dates, you just have one monthly payment, which simplifies budgeting.

Check out DirectAxis’s consolidation loan calculator to see how much extra money you could access each month.

Fixed Interest Rates

By using a loan to pay off as many of your outstanding debts as possible, you can lock into a fixed interest rate, avoiding rate fluctuations you may have had with other accounts.

Lower Monthly Payments

You can stretch the term of your loan over a longer period of time, lowering your monthly payments. You usually can choose how long you want to repay the loan. With DirectAxis, you can repay a loan over a term of between two to six years.

Improved Cash Flow

By combining your debts, you also eliminate multiple monthly service fees. And by stretching the term of the loan, you free up more cash for other needs.

You also have the flexibility to choose which creditor accounts you’d like to settle. Consolidation does not negatively affect your credit score, and if you stay on top of your payments, it could improve your credit history.

A consolidation loan may be for you if you’re struggling to keep up with multiple account payments and if you find yourself short of cash. You can learn more about consolidation loans and see if you qualify for one here.


You may be wondering if it makes more sense for you to just use a credit card instead of a personal loan for your financial needs. Here are some differences.

With a credit card, you use a revolving line of credit, which means you can use the available credit as needed. Your balance will vary, and your payments may vary as well month to month. You are given a credit limit and you can either pay your balance in full or carry over the balance and pay interest until it’s repaid.

Interest is calculated on the full outstanding balance at each statement date, meaning interest accumulates and is added to the amount you owe each month.

With personal loans, your repayment is for a specified term, so you know exactly when your loan will end and how much you’ll pay (if you have a fixed interest rate).

So which type of credit is best for you? Well, typically if you need a small amount of money, you could use a credit card and pay the amount over a short term. But for larger amounts that you’ll need, for example, more than 12 months to pay off, a personal loan is a good option.


When it comes to applying for a personal loan, the process is simple, but you must be prepared and knowledgeable of the lending environment.

South Africa has a strict lending law with the introduction of the National Credit Act (NCA), which was implemented to protect both lenders and consumers.

The legislation regulates the maximum fees and credit rates lenders can charge. Reputable lenders will always give you information on those figures before you agree to a loan.

The NCA does require lenders to make more eligibility checks such as checking your credit history, income, debt to income ratio and other expenses.

Check Your Credit Score

Your credit score is one of the main factor lenders will use to determine if you are worthy of a loan, so you should keep tabs on it before applying for a loan.

You can find out your credit score from any of the four major credit reporting bureaus:

1.      Experian,

2.      TransUnion

3.      CompuScan

4.       XDS

You should check your credit report to ensure there aren’t any errors that could hinder your eligibility for a loan.

Credit scores range between 330 and 850, with the higher score giving you a better chance of obtaining a loan.

Lenders have their own criteria for what they consider a strong credit score.

Always work to boost your score to better your chances of getting a loan with favorable terms. Some ways to improve your score include:

·         Pay your accounts in full and on time

·         Keep credit card balances low

·         Limit credit enquiries

·         Close unused lines of credit

Choosing a Loan

When choosing a loan, make sure you do your research before you go to a lender so you have an idea of what type of loan you want, how much you need, and what you want to pay monthly. Here are some things to consider before agreeing to a loan.

            Can you afford it?

Make sure you can comfortably repay the loan. Take into consideration unforeseen circumstances, such as your salary being reduced.

Could you still afford payments if you earned 10% less? Make sure that you would still have a comfortable amount of cash left over after the monthly payment.

DirectAxis has a personal loan calculator that estimates a monthly payment based on the amount you want to borrow.

Loan duration

How long do you want to repay the loan? A longer term means your monthly payments will be less, but you’ll pay more in interest when the loan is stretched out. Consider the full cost of the loan as well as your monthly repayments.


Consider loan fees, such as initiation fees and monthly service fees. Make sure you check how much those fees are and take them into account when figuring out what you can afford.

What Do You Need to Apply

The loan application process is fairly quick and simple, but you need to meet some requirements and provide documents to verify information.

·         A good credit record

·         Regular monthly income

·         A bank account

·         Proof of identify (a clear copy of your South African ID document)

·         Proof of residence (a recent document confirming your residential address)

·         Proof of income (copies of recent payslips or bank statements)

Loan Protection

When taking out a loan, it’s a good idea to have insurance on it. In the event you become retrenched, disabled, or die, you want to make sure your family isn’t saddled with a large debt.

Many loans, including all of DirectAxis’ loans, come with a protection plan that settles your outstanding loan balance in the event of your death, permanent disability or certain illnesses, and provides limited protection for temporary disability. Make sure you ask lenders about loan protection.


Once you’ve received a loan, it’s now time to make sure you manage it properly so you don’t fall behind in payments.

Set a Budget

To manage your loan and your overall finances properly, it’s important to set a budget and stick to it.

Budgeting will help you set aside money each month to make your loan payment and pay other accounts on time as well. There is nothing more important to your financial reputation than making timely payments. Fixed repayments of personal loans make the budgeting process easier.

Being late on payments or getting behind on payments not only negatively affects your credit score, but also your future creditworthiness. If you’re considered a liability to lenders, you may not be able to obtain credit for two years or more.

Budgeting is simply tracking your income and expenses and setting aside money to meet specific financial goals. You can monitor your budget with online tools or apps, or use a more traditional spreadsheet.

You should particularly examine your discretionary spending, which is non-essential purchases. Record everything you purchase to get an idea of your spending habits and where you can cut back. Also, look for ways to save money on necessary expenses such as groceries, electricity, travel, and housing.


Personal loans give you the power to better your life. They are a good option to help you meet your financial needs, manage debt, or make improvements to your home. They provide flexibility, manageable repayments, and you can use the money for whatever you choose.

However, you must consider whether you can make the repayments on the loan and if the total cost, including interest and fees over the entire term, makes sense for you.

If you’re looking for financing help in the form of a personal loan, visit DirectAxis to fill out a loan application or give us a call at 0861 02 03 04.