What are the right questions to ask when applying for a student loan?

Many of us will need to borrow money from time to time - and some of this may be needed to help finance our studies. The world of credit can be a scary and misleading journey.

There are several factors to consider when borrowing money. Most of us only consider the monthly instalments when taking out a loan but the interest rate and repayment term have a far bigger impact on our bank accounts than we realise.

Here are some guidelines to aid you in understanding how financing works:

When you borrow money the bank will give you on option on terms, and will charge you interest.

The term is the period you have in which to pay back the money. The interest rate is the cost of borrowing money, and on short-term loans is typically expressed as an annual percentage. Despite this, it is often calculated monthly or even daily. Both the term and the interest rate help to determine the size of your monthly repayment, and the amount of time you'll spend in debt.

SHOP AROUND

With a higher interest rate, your monthly payments will increase. If you borrow R10 000, for 12 months at 9% interest, your monthly instalment will be R874.51. But if you borrow the same amount of money, also for 12 months, at 11% interest, you can expect to pay R883.82. These differences seem incremental but consider that this variance is accentuated for larger amounts, and longer time frames.

COMPOUND INTEREST

Compound interest adds a further complication, and applies to most situations when we borrow money. This is interest on interest. It is when the interest of a sum of money is added to the principal, and then bears interest. It occurs when the interest we owe is added to the sum of money we borrowed (principal amount) and itself earns interest.

LONG-TERM COMMITMENTS

We also have to think about the term of the loan. If you have a longer term, your monthly payments may be lower, but will end up paying more money over time, based on the interest being charged over a longer period. It's better to borrow money over a shorter term, and to get the lowest interest rate one can.

Paying off debt affects your ability to save money and achieve financial goals such as buying a vehicle, a house or travelling overseas, so you should always aim to pay back loans as soon as you can. If you default on a loan, it will be harder for you to get credit in the future.

SOME MUST-ASK QUESTIONS BEFORE TAKING A STUDY LOAN

1. What will my monthly instalments be?
2. How long will the repayment period be in years or months?
3. How much is the interest and how is it calculated?
4. Is the interest rate competitive – could I get a cheaper rate elsewhere?
5. Will you be charging compound interest?
6. How much will I be paying by the time I graduate and start working?
7. If the interest rate goes up by 1%, how much more will I have to pay monthly?
8. Do I have to take compulsory life insurance with the loan?
9. What will happen if I can’t pay the loan back?

When it comes to borrowing money, student loans are the cheapest option compared with commercial loans or short-term credit solutions.

Eduloan offers education financing, cost associated with starting the loan and monthly service fees at very competitive interest rates. A key advantage with 
Eduloan is that we offer pay-as-go study loans at an affordable interest rate. This means you get to repay your loan as you study leaving you debt free on completion of your course.