Personal loans - consumers need to know what they are signing up for

While there are a number of reasons that a person takes out a personal loan, they need to understand what a personal loan is before making a decision. Picture: Pixabay

While there are a number of reasons that a person takes out a personal loan, they need to understand what a personal loan is before making a decision. Picture: Pixabay

Published Oct 2, 2023


There a many reasons that a person may want to take out a personal loan such as unexpected expenses, home renovations, paying off university fees or to start a business.

A personal loan is a common way for consumers to obtain credit, but is important that they understand what this type of loan is and how it works.

What is a personal loan?

According to Neven Narayanasamy at specialist loans provider, DirectAxis, a personal loan is a type of credit where a lump sum is provided to borrowers. The consumer must repay the borrowed amount, plus interest in monthly instalments over an agreed-upon period which typically ranges from 24 to 72 months.

“In South Africa, personal loans are normally unsecured. This makes them different from vehicle or home loans, where there is something of value such as a house or a car that provides the lender with some security,” Narayanasamy said.

Personal loan application process

Lenders use your credit score to determine whether you qualify for the loan and to check your risk profile. The better your credit score, the lower the risk for the credit provider.

During the application process the loan provider is required by law in terms of the National Credit Act to do some checks which will put the responsibility on the credit provider to ensure you can afford the loan.

During the personal loan application process, the consumer needs to provide:

– Proof of identity - a clear copy of their South African identity document.

– Proof of residence - a document that confirms their residential address.

– Proof of income. If the consumer is employed, they can provide a copy of their latest payslip and a bank statement. If the consumer is self-employed they will need to submit at least the last three months’ bank statements.

They will then confirm your credit score, income and any money. The credit provider will also calculate how much debt you have, compared to what you earn.

Be honest

While the National Credit Act puts the onus on the credit provider to determine whether you can afford the loan, it is the responsibility of the consumer to provide accurate information and answer any questions truthfully.

Narayanasamy said: “Although you may really need the loan, it’s not in your best interests to exaggerate your income or conceal information.”


Once your loan is approved, the funds are transferred directly into your account. The time you have to repay the loan and interest depends on the credit provider, as well as the amount you borrow, your financial position and your preference for repayment.

The longer the term, the lower the monthly payments, but remember you will also be paying interest on the amount you borrowed over a longer period. You also should try to make additional payments to reduce the term of the loan and the interest.

Narayanasamy said that used responsibly, personal loans can be a useful way to deal with life’s emergencies. Whatever your reason for applying for a personal loan, understanding the commitment you are making will enable you to make an informed financial decision.

Remember that when you are applying for a personal loan, ensure that it is from a registered and trusted credit provider.

Chantel Pieterse, Head of Operations at Unifi South Africa said that when you need to take out a loan, make sure it’s from a registered and trusted credit provider, and also make sure you are not burdened with hidden costs or fees.

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