What is a loan? Can I eat it?

Mar 07, 2016

To answer that question is quite simple actually: a loan is a sum of money borrowed and scheduled for repayment over time with interest.

A loan then is an agreement between a borrower (the creditor) and a lender (the debtor) for an amount of money. This amount of money will in turn be repaid by the debtor to the creditor according to the agreed upon terms and conditions - which usually includes interest. Unless you can find a gracious and unheard of loan provider!

Choosing the right loan may become a difficult task to the uninformed customer. However, with Fincheck at your service, a loan calculator will bring into comparison all the necessary elements to meet your need for the perfect loan.

Many types of loans are available for different types of needs. Yet the basic elements of a loan remain the same. A loan consists of:

 

  • A payback period;
  • An interest rate;
  • And scheduled repayments.

 

A payback period is the timeframe in which a loan's repayment will be scheduled.

An interest rate is the tempo at which the balance of a loan will accumulate as time passes.

Scheduled payments is the way in which repayment of your loan will take place (in either amount or frequency).

Remember, a loan is debt to be cleared by repayment on a specific date. We can now know that a correlation and an interdependence will arise between the three elements of a loan.

Let's set up a figurative illustration for comparison A creditor will supply Loan A for R1000 at an interest rate of 5% per year to be repaid over 2 years in 2 annual payments.

It will be determined that in order to settle the debt at the above mentioned terms and conditions, 2 annual payments of R537.80 will be required. That amounts to total repayment of R1075.60 (R537.80×2).

But let's say you want to repay Loan A within one year at the same interest rate. The loan calculator will determine one payment of R1050 for that year. Thus meaning your total repayment of Loan A over a one year payback period will be R25.60 less in comparison to repaying over a 2 year payback period.

Yet, to another South African citizen, it is perhaps only possible to pay R282 per year. The same Loan A will then be repaid over a payback period of 4 years which will amount to a total repayment of R1128 (R282×4). This is R78 more in comparison to the original terms and conditions supplied through Loan A above.

One element of the loan will always be fixed. The other two elements will teeter-totter according to your needs and preferences.

When you hold more than one loan, it is possible to apply for the consolidation of the loans. Two loans thus become one loan with one interest rate, one payback period and a single payment schedule.

The purpose of a loan is the supply of money right now with which to finance your need, rather than having to wait to accumulate it by your own resources.

So no, a loan can not be eaten. But it can serve as an opportunity to teach a man to fish. And then, to eat his fish.

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Fincheck is a financial comparisons website that organises information to assist the borrower in making their best financial decision.

Fincheck gathers information from numerous banking partners and presents it to the borrower in a simple, understandable way. Lenders benefit from an additional market place and extensive customer reach. Loan amounts vary from lender to lender. Fees, interest rates, loan amounts and credit scores influence the repayment terms. Lenders require personal details to control their risk and assist the government to combat theft, money laundering, terrorism. Fincheck does not endorse any particular product or company. We are an independent company. The information shown and provided is an opinion, based on numbers and must not be seen as advice or consultation.