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Most people have to take out some sort of loan in their lifetime. Whether it’s a short-term loan or a longer-term loan, it’s important to be smart and make sure you know what you are getting into before signing on the dotted line.

Essentially, a personal loan is money borrowed from a bank or other credit provider that you pay back as a fixed monthly loan repayment. A personal loan is an unsecured loan, which means it is not backed by collateral (which is what your home is when you take out a mortgage bond - the bank always has your home as security and can sell it to recover the debt, if necessary).

Here are five tips that will make you smarter about loans:

1. Understand the true cost of the loan. When you are shopping around for the right loan, make sure that you compare apples with apples. The true cost of a loan takes into account the interest payable, any other charges and when the payments are due. Some banks say they offer preferential rates to their current account customers, but you might find there are more affordable loans available elsewhere. So, shop around and get all the facts before comparing loans.

Find out what happens if you miss a payment. What are the penalties?

2. Check your credit rating and the small print. Before applying for a loan, check your credit rating. This can be done annually free of charge through several bureaus. If your credit rating is not in good shape, you may be offered a more expensive deal.

Also, before you apply for a loan, check the small print to see if you're eligible. Some lenders have many conditions that have to be met before a loan is granted. By applying only for loans for which you are eligible, you will cut out a lot of admin and minimise the chances of a rejected loan application.

3. Ask about early repayment charges. Did you know that some lenders charge you if you pay back your loan earlier than the time frame agreed upon? It’s a good idea to check how much this charge will be before you apply for a loan. If you think there is a good chance you will want to settle your loan early, it may be worth searching for a deal that comes without any early repayment charges.

4. You may save more by borrowing more. In general, the larger the loan, the lower the interest rate. So, there's a chance that you might save money by borrowing slightly more. An extra R500 on your loan, for example, might bump you up into a better interest rate bracket which could save you money over the repayment period.

5. Don't apply for too many loans, and consider consolidation. Having lots of applications on your record makes you look desperate or in financial difficulties and could jeopardise your chances of getting a loan. Rather do your homework and apply only to where you meet the criteria and there is a good chance of securing the loan.

Also, if you have existing loans, you may want to consider debt consolidation. Consolidation loans are particularly helpful if you want to simplify your credit by settling other debt and turning several loan payments into one cost-effective payment. 

Neil Thompson is the head of product and customer value proposition at African Bank.

PERSONAL FINANCE