If you’re considering taking out a loan for your next project or big expense, but are put off by the lingo – don’t despair. Financial institutions need to detail all aspects of the loan so that you can understand it better, and when you break down the acronyms and get to grips with interest rates, you can see that a loan doesn’t have to be as confusing as it first seems. Educating yourself is vital before taking out any loan product, and if you’re confused by anything in the terms and conditions of the loan, you should 100% ask before you go any further. It is better to fully understand what you are signing, and the lender should be more than happy to talk it through with you, it’s in their interest after all.
Often a phone call with the lender can be helpful here, but many are put off this approach as it creates the added pressure of a person on the phone trying to sell you the product, the definitions are potentially biased and one feels a pressure to understand quickly that doesn’t happen when you’re allowed to absorb the information at your own pace (from the comfort of your armchair on a smartphone). What that in mind – here are the main confusing aspects around loans and their simple definitions:
The names of loans
If you want to discover the cheapest loans in South Africa, you might have searched the internet and come across many loans titled different things. The most frequent confusion is between ‘personal loans’ and ‘instalment loans.’ But what’s the difference? Wonga sums it up nicely in this post,
-A ‘personal loan’ is money that’s borrowed from a bank, or can be applied for as an online loan, where you borrow a smaller sum of money (usually less than R10 000), and usually commit to repaying it in one repayment with interest (called a lump sum).
– an ‘instalment loan’ is different from personal loans in that rather than repaying your loan with interest in one lump sum, instalment loans give you the flexibility to set what is called a ‘repayment period’ – where you make regular repayments over an agreed period of time (such as 3 or 6 months).
This is another area that people have gripes with, especially between the term APR and Interest rates. Bankrate.com say “The interest rate is the cost of borrowing the principal loan amount. The rate can be variable or fixed, but it’s always expressed as a percentage. The APR is a broader measure of the cost of a (loan) because it includes the interest rate plus other costs such as broker fees…expressed as a percentage.” So next time you see this on a loan description, now you’ll know the difference. You should compare interest rates carefully when choosing a loan, as they can vary from each provider and can really make a difference in the amount you pay in the long run.
Unsecured loans are a type of loan that does not require you to put collateral against the loan, such as a credit card or payday loan. This means that you do not have the risk of losing any assets, property or investments. A secured loan is money you borrow that is secured against an asset you own, usually your home. It is important to know this difference so you understand the loan fully.