How to Read a Loan Quote: Interest, Fees and Total Cost
When you are short of money, it is tempting to look only at the amount you will receive and the date it will arrive. But the number that really matters is how much the loan will cost you in total. A loan quote contains all the information you need to work that out, as long as you know where to look. This guide walks you through the parts of a typical loan quote in South Africa.
Why the quote matters
In South Africa, credit providers must give you clear information about the cost of credit before you sign. You should receive a quote or pre-agreement statement that sets out what you will pay. Read it carefully. It is the best tool you have to compare offers and to decide whether a loan fits your budget.
The parts of a loan quote
The principal
The principal is the amount you borrow. It is the starting point for everything else. A common mistake is to borrow a little more than you need just in case; that extra amount carries interest and fees too.
Interest
Interest is the charge for borrowing the money. It is usually expressed as a rate, but on a short-term loan the rand amount is more useful than the percentage. The National Credit Act and its regulations set the maximum interest rates that registered lenders may charge for different types of credit.
Initiation fee
An initiation fee is a once-off fee for setting up the loan. The regulations under the National Credit Act limit how much it can be. Check whether it is added to the loan or deducted from the amount paid to you.
Service fee
A service fee is a monthly fee for administering the account. On a loan repaid within a month you may see it once; on a longer loan it is charged every month.
Credit life insurance
Some loans include credit life insurance, which covers the outstanding balance in certain events, such as death or disability. If it is included, the quote should show the cost. You are generally entitled to use an existing policy instead of the one offered by the lender, so ask about it.
Total amount repayable
This is the most important line on the quote. It is the principal plus all interest, fees and insurance. If you remember only one thing from this guide, make it this: compare loans by the total amount repayable and the repayment date.
A simple way to compare two offers
When you have more than one offer, line them up and compare:
- The amount paid into your account
- The total amount you will repay
- The difference between the two, which is the true cost of the loan
- When the repayment is due and how it will be collected
- What happens if a payment is late
The offer with the lowest monthly repayment is not always the cheapest. A longer term can mean a lower instalment but a higher total cost.
Total cost versus instalment
It helps to separate two questions: what the loan costs in total, and whether you can afford each payment. A loan can have an affordable instalment and still be expensive overall, especially if it runs for a long time. A short-term loan works the other way round: the total cost is fixed over a short period, but the full amount is due at once. Look at both numbers before you decide.
Using a loan calculator
A loan calculator lets you see the cost before you apply. On our loan calculator you choose an amount and see what you would repay. Try a few amounts: you may find that borrowing a little less makes the repayment much easier to manage.
Red flags in a quote
Be cautious if:
- The lender will not give you the costs in writing
- The total amount repayable is not shown
- You are asked to pay a fee before the loan is paid out
- Fees appear in the agreement that were not in the quote
- You are pressured to sign immediately
Any of these is a reason to stop and ask questions, or to walk away. Our guide on spotting loan scams explains why upfront fees in particular are a warning sign.
Questions to ask before you accept
- What is the total amount I will repay?
- Which fees are included, and are any optional?
- What date is the repayment due, and how is it collected?
- What will it cost me if I pay late?
- Can I settle the loan early, and will that reduce the cost?
Know your rights
The National Credit Act gives you a number of rights as a borrower, including the right to receive information in plain and understandable language. If something in the quote is unclear, you are entitled to ask. Read our overview of your rights as a borrower for more.
The bottom line
A loan quote is not just paperwork; it tells you exactly what the loan will cost. Focus on the total amount repayable, check every fee and make sure the repayment date works with your payday. For more on choosing the right loan, see how to choose the right personal loan, and if anything in our own quote is unclear, contact us.
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