Life is full of surprises, and sometimes you’re faced with an expense that you’re just not prepared for. In such cases, many people will rely on a personal loan. But credit comes at a cost, and many people focus on getting the item or the money they need rather than how much it will actually cost them. Here we take a closer look at the different factors affecting the cost of a loan in the hope that these will help you make an informed decision when you need to apply for credit.

Interest

Interest rates can vary quite widely and depend on a number of factors such as credit type, repayment term, and the credit score of the borrower. You may be presented with a choice of flexible or fixed interest rate. A fixed interest rate is exactly that - a fixed rate through the loan period. A flexible interest rate can increase or decrease depending on the prime market rate.

Initiation Fee

This fee is paid when you first take out the loan and is paid only once. Depending on the amount, type of loan, and credit provider, this fee can easily exceed a thousand rand. An initiation fee can be added to the total loan amount (and paid in the monthly instalments) or paid upfront.

Service Fee

With almost all loans, there’s a monthly fee for administration costs. Of course, if you have multiple loans, these can add up. For this reason, some people who have several loans might bundle their debt into a single debt consolidation loan thus reducing servicing fees to one.

Credit Life Insurance

If you die, become disabled or retrenched, your family could become responsible for settling your debt. Credit life insurance ensures that this doesn’t happen. In the event of death, disability, or retrenchment, and subject to policy conditions being met, your debt would be covered by the insurer.

Loan Term

The basic requirement of any loan contract is to meet minimum monthly payments over a period of time. If you can do that, great! But if you want your loan to cost you as little as possible, pay it back as soon as you can (the sooner you pay back your loan, the less interest and admin fees you’ll pay).

Here’s some math to illustrate the point. Let’s say that you take out a personal loan for R100 000 at 18% interest and with credit life insurance at R4.50 per R1 000. The total cost of the loan could vary greatly depending on how quickly you paid it back. Below, we show how much the loan in the example would cost you over three, four, and five years.

You can also use our personal loan calculator to get an estimate of what your monthly repayments would be for a loan of a certain size (the estimate includes credit life insurance and service fees).
In need of a loan? Get more information about Old Mutual personal loans.