What is an Unsecured Loan?
An unsecured loan is issued based on the borrower’s criteria and their own creditworthiness without collateral. Unsecured loan examples such as personal loans are approved without any type of collateral such as property and other valuable assets.
A higher credit score is typically required for approval of certain unsecured loans – thus your credit history will determine if you qualify for an unsecured loan.
Mortgages or car loans are good examples of a secured loan, whereas unsecured loans are riskier without collateral.
- Unsecured loans are offered based on the borrower’s creditworthiness without collateral
- Unsecured loans are riskier and have high-interest rates.
Types of Unsecured Loans
Any loan that doesn’t require assets as ‘security’ for the borrower is considered unsecured and it includes credit cards, student loans, and personal loans. These examples can be considered as a term or revolving loans.
1. Term Loans
This type of loan requires a pre-determined period to pay off a debt in equal installments, this may be affiliated with a secured loan, but it is also an unsecured loan.
2. Revolving Loans
This type of a loan has a credit limit – with the credit allocated, you can do your usual banking transactions (Make purchases, repay the credit and spend the credit again), an example of such a loan include credit cards.
3. Consolidation loans
When you pay off your debts as a single payment from a bank is considered as an unsecured term loan.
Payday lenders such as Wonga offer unsecured loans – from the phrase ‘payday’ – not much of scrutiny is necessary except proof of income. However, you may undergo a credit check to minimize unpaid debts. Usually, payday loans lenders make use of debit orders as a form of loan repayment.
Unsecured loans in South Africa
Unsecured loans are the vastly growing type of loans in the world. African Bank is planning to re-launch its credit card in 2020 after it came out of curatorship in 2016. Absa has always been restricted by Barclays (former conservative parent company) and has started to offer more unsecured loans.
If you are a high earning FNB premium client, you are more likely to get a personal loan. Unsecured credit is the most lucrative product for financial institutions (Higher interest rates).
According to NCR, 10.2 million (40%) credit-active consumers struggled to pay their accounts on time by June of 2019. About 7.8 million of South African Residents have taken out a combination of $15 billion of loans with collateral. The idea was to help who are in need, when in fact; it left them in worse conditions. Banks compete on getting the largest loan size than customer value according to Differential Capital.
Capitec Bank implemented a stricter policy and its results show that 47% of its unsecured loans went to people earning more than R20 000 per month.
TymeBank plans to offer unsecured lending in full-scale from February 2020 and has already bagged over 1 million customers since its launch.
President Cyril Ramaphosa on unsecured loans
The South African President has signed the National Credit Amendment Bill into law in August of 2019 – this is to help over-indebted consumers to have their payments suspended in full or partially for as long as 2 years (24 months).
You may also have your loan scrapped if your financial situation is seen to be exasperated. The bill applies to consumers earning R7 500 with unsecured debt amounting to R50 000 or found over-indebted critically so by NCR (National Credit Regulator)
The Biggest Unsecured Loan Lender in South Africa
The biggest loan lender in South Africa is Capitec Bank Holdings Ltd. The Big four banks (Standard Bank, First National Bank, Absa, and Nedbank) affordability tests are rigorous and thus leaving them with fewer approved unsecured loans.
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