• Wonga, the well-known short-term lender, has added to its range of consumer finance products with a new personal loan. Like a payday loan, the personal loan is unsecured, which means assets such as vehicles and property are not required as collateral.

    The key differences between payday and personal loans are the amount of money borrowers can access and the repayment period. The personal loan, also known as an installment loan, allows new customers to borrow a maximum of R4000 which they repay in equal pre-scheduled repayments (or installments) over a period of 2-6 months.

    How do personal loans work?

    New customers who choose to borrow the maximum loan amount of R4000 over 6 months will repay a total of R5400 (including interest and fees). That will be repaid in 6 x R900 installments, with a payment made each month. That provides greater affordability for people who need to borrow the money for a longer period of time.

    If an individual were to borrow R4000 over 30 days, the total repayment (including interest and fees) would be R4735. That would have to be repaid in a single payment, making it unaffordable for many borrowers.

    Bridging the affordability gap

    Wonga South Africa’s personal loans are designed to meet the consumer need for quick access to credit without having to make the full repayment after 30 days, or commit to longer repayment terms that make the loan more expensive. As a comparison, one of South Africa’s largest banks offers R4000 personal loans for a minimum of 12 months resulting in a total repayment averaging R6260.

    Having the flexibility to choose the repayment period for the loan, from 2-6 months, allows borrowers to create an affordable repayment plan and gives them more control over their monthly budget.

    When might a personal loan be right for you?

    It should go without saying that this type of consumer credit is not something you should access unless you really need to. You must also be completely confident in your ability to make the repayments in full.

    Personal loans should not be used as a solution to long-term financial issues;

    Personal loans are not intended to help you manage existing debt;

    Late repayment of personal loans is likely to lead to additional charges and may affect your credit rating.

    What is your experience of personal loans? Is this a product you might be tempted to use? Please share your thoughts in the comments below.