We have all found ourselves in the type of situation where we need to borrow money but we are not 100% sure who to get it from. Our first choice is often to call upon what is termed the “F-squared” – in other words our friends or family. However, this is not always the easiest option as some find it more difficult to ask a loved one for money than a stranger.

The second alternative is usually to look to a bank to take out a loan but with all the different options, rules and clauses attached to taking out a loan, it can sometimes become confusing and we may land up making the wrong choice.

Here is a simple guideline to maneuvering your way through the world of loans.

What is a loan?

A loan is a financial agreement between two parties whereby money is borrowed for a specific purpose whether to buy a house or car or pay off a credit card. The borrower signs an agreement to pay back the full amount with interest.

What is interest?

Interest is the cost of using someone else’s money. When you borrow money you pay interest. It is usually a percentage of the original amount lent to the borrower and is worked out depending on how long the borrower has to pay the money back.

How is interest worked out?

Interest is worked out as either a daily or yearly interest rate, depending on the borrower’s agreement with the lender. To work out yearly interest you take your original amount borrowed and multiply it by the interest rate . So, if the interest rate is 8% you multiply the amount by 0.8%. To work out daily interest, you need to divide your yearly interest by 365.

How do you qualify for a loan?

Finding out if you qualify for a loan depends on the type of loan you want to take out. There are many different types including personal, mortgage, micro and macro and each comes with its own rules. It is therefore important to research the different types of loans to see which one best suits your needs.

Examples of different loans

Long term = these are loans that are paid off over more than a year. This kind of loan usually buys you a house or car:

  • Mortgage loan or bond = this type of loan is taken out when buying a house or land to build on. The lender is usually a big financial institution like a bank.
  • Personal loan = this type of loan is smaller than a mortgage loan and is taken out when you need to finance your car, do renovations to your home, consolidate any debts that you may have or even to pay for a holiday

Short term loans = these are loans that are taken out for emergencies and when you need cash immediately and you just don’t have any of your own. The time frame for paying back a short-term loan is less than a year. Examples include:

  • Micro loans = this type of loan is taken out when you need money quickly. They pay out R500-R15 000 depending on your needs and the money is available within 24 hours from approval.
  • Instant cash loans = this type of loan would you bridge the gap in your cash flow temporarily. Money is paid out within 10 minutes of approval.