When emergency expenses arise, borrowing money might be a necessary step. If you need to borrow money to cover an unexpected financial need, here are five ways to make the process more affordable.

1. Ensure you can meet repayments

It may sound obvious, but the number one issue which increases the cost of a loan is missing repayments. When consumers are unable to pay by their due date, penalty fees may be applied, interest will increase (as the loan is serviced over a longer period) and, over the long term, the debt can spiral. To ensure your loan is as affordable as possible, be realistic about how much you need to borrow and when you will be able to repay it. This will prevent the spiralling costs of defaulted loans.

2. Borrow as little as possible

While it’s important to be realistic about how much you need to borrow (taking out two loans will mean twice the admin fees!), keeping your loan as small as possible will make it more affordable as it will incur less interest.

3. Borrow for a short period

Keeping your loan period as short as possible will also reduce the amount of interest you loan incurs, again minimising the overall cost of borrowing.

4. Do your research

Understanding the different types of loan which are available to you will help you to make a money-savvy decision about the cheapest option. In South Africa there are two key short term loan types:

  • Personal loans are usually arranged for amounts of R10,000 and below. These smaller loans are designed to be short-term, generally spanning a loan period of just one month. They are typically repaid in one lump sum (i.e. when you receive your paycheck at the end of the month) and do not require you to have collateral. This means they are not secured against your property.
  • Instalment loans are usually arranged for slightly larger sums compared to personal loans and are repaid over a longer period – in instalments. For consumers unable to repay a loan in one lump sum, these loans spread the cost and allow more flexibility when it comes to repayment. As they are often longer loans, however, interest is likely to accrue which may make them more costly than a personal loan in the long run.

5. Shop around

There are many calculators and free resources available to help you compare the cheapest loan types, but be aware that some of these calculators may have biases and may earn commissions – so do your research before relying upon a particular source.

It’s also important to remember that interest rates are just one part of the puzzle. There are many other fees and possible “extras” to consider when arranging a loan. Admin fees, early repayment fees, and penalty fees will all differ from loan provider to loan provider. One of the best ways to compare loans is to get individual quotes from a range of lenders, then list all of the charges (including the interest rate) to calculate how much each loan will cost you in total.

If you think you are likely to be able to repay your loan early, for example, it may be more cost-effective to choose a loan provider that does not charge early repayment fees – even if the interest rate is slightly higher. Do the maths and find out which loan will be most cost-effective for your unique circumstances.

Leave a Reply

Your email address will not be published.