Everything you need to know about Secured Loans in South Africa

Key Takeaways

• You can get a secured loan that fits your current credit score
• Common types of secured loans include mortgages, home equity loans, and vehicle/car loans
• Any asset of value can be used as collateral to get a loan
• You can secure both a business loan and a personal loan
• You can easily get a secured business or personal loan by simply following our guide below
• Interest rates, time of repayment and instalment of secured loans vary from loan to loan
• The lender could seize the collateral you put up if you don’t pay back your secured loan. That could be your home or car, depending on the type of secured loan you’ve taken.

Why choosing secured loans can save you money

Getting a secured loan had financially bailed out many businesses and people who needed money urgently in South Africa. Secured loans allow you to get a loan amount that is well beyond your credit score limit and that’s been doing great for many over the years.

Below are the main advantages of secured loans

Relatively low-interest rates as compared to unsecured loans.

This is mainly because of the security you provide that minimises the risk of default despite the credit score. If your credit score is also higher, this may guarantee even lower interest rates and more favourable terms from the lender

Relatively large loan amounts as a proportion of the value of the securing assert

The low default risk associated with secured loans tends to tempt many lenders to be open to giving out larger loan amounts. Also, the higher value of the securing assert also guarantees a higher loan amount.

Low monthly repayments

Secured loans give you a higher negotiating power to ask for a lower monthly repayment based on the securing asset. A low monthly repayment allows you to remain with more money to spend on other personal needs hence increasing your monthly purchasing power.

Helps to restore falling loan credibility

The low monthly repayments associated with secured loans allow you to pay your instalments in time. Timely payments or instalments show the commitment and trustworthiness that will then help to raise your credit score for future loans.

Some tax deductions allowed

Some secured loans, like mortgages, let you deduct the interest you pay from your taxable income, subject to some restrictions. Some home equity loans offer this perk, depending on what you use the proceeds for.

Relatively easy to get a loan 

You are more likely to qualify for a loan because you’re putting up collateral. The lender takes what you’re using to secure the loan into consideration rather than relying so heavily on your credit score and history.

All you need to know about secured loans in general

Secured loans, require collateral to borrow. In most cases, the collateral for a secured loan may be the asset you’re using the money to purchase. If you’re getting a mortgage for a home or a car, for example, the loan is secured by the property or car you’re buying. The same would be true with equipment.

If you default on the secured loan, meaning you fail to make payments in full or in time, the lender can seize the collateral that was used to secure the loan. So with a mortgage loan, for instance, the lender could initiate a foreclosure proceeding. The home would be auctioned off and the proceeds used to repay what was owed on the defaulted mortgage.

Secured loan alternatives will be high-cost propositions in most cases. Payday loans offer fast funding that’s borrowed against your next paycheck, but your annual percentage rate could be has high as 400%.

It is important to know precisely what you are promising and what you stand to lose before you take out a secured loan.

Are secured loans Tax Deductible?

Unlike personal loans that are not tax-deductible, most secured loans like mortgage loans, and some secured business loans are often detected on annual taxes hence reducing your taxable amount of the year.

However, certain conditions have to be met before the above deductions are done. Mortgage interest, for example, is only deductible if the loan was taken out to fund the purchase of a primary residence.

You may be able to claim a tax credit which directly reduces the amount of tax you owe rather than your taxable income for mortgage interest if you were issued a mortgage credit certificate through a government program for low-income housing.

Tax deductions and other loans

• Interest paid on personal loans, car loans, and credit cards is generally not tax deductible.
• However, you may be able to claim the interest you’ve paid when you file your taxes if you take out a loan or accrue credit card charges to finance business expenses.
• Interest on qualified student loans, which are used to pay for qualified educational expenses, is tax deductible.

Do l qualify to get a secured loan in South Africa?

Nine times out of ten, you qualify for a secured loan to buy a house, a car or anything that you need a loan for. Below is a list of the required documents:

• South African Identity Card
• Latest payslip/s
• A list of monthly expenses that match the above payslip
• If you are applying jointly, e.g with your partner, all the documents above are required for both parties
• If you are applying as a business, then the full legal documents and tax clearances of your business will be required.

The types of secured loans you can get

Secured loans can solve many of your financial needs as listed below

Mortgage loans

Mortgages are the most common among secured loans whereby one borrows to build or buy a house or any real estate property. The borrower then attaches the purchased property as collateral in case of default.

Vehicle loans

These are another type of secured loan used for purchasing motor vehicles either by businesses or individuals. The purchased vehicle will be attached as collateral for the loan as well. In case of default, the lender will possess the vehicle.

Business loans

A separate business entity can attach some of its assets to get a loan for any reason it wants to cover. That may include wages and salaries, investments and purchases of new machinery.

Many times, business loans may include a personal guarantee that gives the lender the right to legally sue the person in case the business defaults or goes bankrupt.

Secured personal loans

This is a loan where the lender gets the loan amount and uses it for personal expenses. The lender will attach an entirely different asset as collateral.

Home equity loans

This time of loan involves attaching the value of your home and taking a lump sum loan amount, and interest rates become effective immediately.

Life insurance loans

This type of loan depends on the Life Insurance policy claim amount. This means you repay the loan throughout your lifetime or allow the value to be deducted from the death benefit paid to your beneficiaries when you die. This type of loan is only valid for holders of permanent life insurance policies such as variable or whole life insurance.

Bad Credit loans

You can get this particular category of secured loans if you have a poor credit history. It works for those who are now struggling to get loans without any security due to failing to pay previous loans. Bad credit loans may require a certain amount of cash as collateral to reduce the risk. The biggest challenge of a bad credit loan is the very high-interest rates attracted by a very low credit score.

Loan for land: 

A land loan is used to finance the purchase of land. This type of loan uses the land itself as collateral.

What can be used as collateral when securing a loan?

Almost every asset of value can be used as collateral, but this depends on the type of loan you are looking for. It also depends on the need you want to satisfy with your borrowing money. This means that appropriate collateral can rely on several factors, such as:

• Real estate such as houses, commercial buildings, land and equity in real estate
• Bank accounts, including checking accounts, savings accounts, money market and capital market accounts and certificates of deposit accounts C.D.s.
• All vehicles, including trucks, SUVs, boats, cars, motorcycles and any other recognised vehicle of value
• The business assets like machinery, Plant and equipment, inventory and many others
• Financial investments like bonds, stocks and mutual funds
• Any other valuable assets like jewellery, precious metals, coins and collectables

N.B. – Anything of value not listed above may give you a chance to get a secured loan. Hence it would be best if you always tried many lenders before giving up.

Assets that are difficult or problematic when security is granted over them in South Africa

Future assets

To create genuine security in an asset, the asset must be delivered, or deemed to be delivered, to the creditor. It is generally accepted that rights to future intangible assets can be granted as security for intangible assets. However, when dealing with immovable or intangible movable assets, at best, there can only really be an undertaking by the debtor to deliver the support (or procure the registration of a bond over the support) once that support is in its possession.

This undertaking is nothing more than a contractual undertaking, which affords no absolute security. A general notarial bond can be passed over all present and future movable property. Still, until the property is attached and taken into the creditor’s possession, no absolute security is created.

Intangible assets present difficulties regarding the granting of security. A person’s right to grant protection over an intangible asset can be restricted by common law, agreement, and statute. Under common law, the principal restrictions on a person’s right to cede an intangible asset are that:

The cession cannot burden a third-party debtor’s position. Therefore, a cession of a portion of a debt is not valid without the third-party debtor’s consent.

A session that deprives a third-party debtor of a set-off is invalid if the debtor and the creditor have acted in bad faith to deprive the third-party debtor of the right of set-off. Personal rights are incapable of cession (for example, the rights of partners against each other), as are rights under employment contracts.

Fungible assets

Taking security over tangible movable fungible assets presents difficulties, as the purchase must be delivered to the  holderdeposit to create absolute security.

A security interest in a tangible movable fungible asset is usually created using a general notarial bond, but an available notarial bond will only give the security holder a limited security interest.

Other assets

The law governing security over minerals in the soil and mineral rights is complex. Restrictions on granting security over these assets are contained in the Mineral and Petroleum Resources Development Act 2002.

Essential steps in applying for a secured loan in South Africa

Generally secured loans are available through traditional credit unions and banks, online lenders, auto dealerships, and mortgage lenders.

Credit score checking

Before applying for any loan, check your credit rating/score using a free online service or credit card provider (bank). After knowing your score, use it to familiarise yourself with the loans you qualify for or improve your rating to get the best loan terms.

Revisit your budget and needs

When you are ready to get a loan, revisit your budget to see if you can pay it back without much hustle. Also, consider existing debts that you have before finalising your loan amount.

Professionally evaluate the value of your collateral

In most cases, you end up attaching an undervalued collateral out of separation. Thus it is vital to consider professional valuation, especially of real estate or properties, before attaching it to the loan.

Intensively research the best loan.

After getting your credit score and the amount of money you want, it’s critical to look around at different lenders to get the best loan. A good loan is one with a tenure that you can match, interest rates and monthly instalments that you can easily pay. Arguably, this is the most critical stage where you must be patient and clever. Professional assistance may be critical as well.

Contact your current lender to learn more about your options if you’re considering a HELOC or home equity loan. If you’re planning to apply for a secured personal loan, look for lenders that offer prequalification without a hard credit check.

Submit your formal application.

Now that you have considered every possible avenue, you can formally apply for your loan. Always bring your appraisal for your collateral, and apply to at least two lenders in case one application fails.

Follow up on your application.

Moreoften than, physical copies of loan applications get missing due to the number of forms lenders receive daily. This makes it essential to follow up on your application to check if they have reviewed it. This doesn’t only guarantee your consideration but also shows how serious you are about getting a loan.

Once the loan is approved, submit a formal application. It’s also ideal for reworking your budget before the loan is funded to ensure you don’t fall behind on loan payments and possibly lose your collateral.

What happens when you fail to meet the loan repayment requirements?

If you fail to pay the monthly instalment in time or to pay the loan repayments as per the contract, the lender retains the right to action the attached collateral and recover their lump sum.

You may lose the assets. 

This means that if you had bought a house and attached it as collateral in a housing-secured loan, you would lose the home you had purchased.

How can the lender enforce many types of security in case of default by the borrower?

With securities like a pledge or bonds, the secured lender can obtain a court order directing the sheriff of the High Court to attach the relevant asset of the borrower, produce the sale of certain assets and apply the proceeds to pay for the outstanding loan amount obligation.

In some cases, the lender and the borrower may agree that the lender sells the secured asset and repay the outstanding balance without involving the courts.

How does the lender’s rights to enforce its loan, guarantee or security affected by insolvency procedures?

Once the insolvency procedures start, the secured lenders surrender all the assets to the Liquidator.

If the secured lender can realise value from the moveable property, then the following procedures are followed:

• If the property can be sold through a stockbroker, the secured lender can sell the property before the second meeting of creditors.
• The creditor can sell the asset through a financial instrument trader if it’s a financial instrument.
• If the asset is a Bill of Exchange, the lender can sell it through any means approved by the Liquidator.
• If the asset is a right of action, the lender can not sell it without the approval of the Liquidator.
• If the property is any other asset, the credit can sell the property through a public auction after giving the Liquidator reasonable time to inspect it at an approved notice as provided by the Liquidator.

The order that creditors/lenders are paid on the borrower’s insolvency

Secured creditors

The Insolvency Act provides the methods by which a secured creditor’s security can be realised. Each secured creditor whose security is properly perfected has a secured claim over the property,y constituting its security. A proven fast claim must be paid priority to any other claim from the realisation of that property after deducting liquidation costs.

The creditor is responsible for those costs,representingt the costs of maintaining, conserving and realising the property. Where secured creditors have security over the same asset, the creditor granted security earlier in time has a higher-ranking claim in respect of that asset.

Free Residue

After secured lenders are paid, the remains are applied in the following order.

• Liquidation and execution costs
• Proved preferent claims to which the Insolvency Act (or any other statute) has assigned a preference in the following order:
  The salary and wages of employees (and specific different amounts payable to, or on behalf of, employees which are subject to certain statutory limitations);
  any part which, in terms of the Workmen’s Compensation Act 1941;
  any amounts owing to the South African Revenue Service for taxes in terms of the Income Tax Act 196 and certain other statutory taxes;
  claims arising from unperfected general notarial bonds. Once the holder ofan availablel notarial bond goes into the possession of the property secured, it becomes a secured creditor (see above, Secured Assets).
• Concurrent claims include the unpaid amount of the secured lenders from any proven secured claim.
• Subordinated creditors, if they have subordinated their claims to the claims of concurrent creditors.
  Shareholders (holders of preference shares generally take priority to holders of ordinary shares).

What happens when multiple lenders are secured on the same asset?

If this situation arises, that asset’s first creditor to be secured takes priority. The other creditors will only have security after the debtor’s revisionary interest in thepurchpurchpurchase.

Creditors can agree to equality when creating security over immovable property.

If a security interest has not been validly perfected, the security holder is not considered a secured creditor in respect of that asset and ranks as a concurrent creditor.

However, the holder of a security interest under a general notarial bond will rank as a preferential creditor in respect of the borrower’s movable assets, even wherethe security holder does not perfect the general notarial bondr by attaching the relevant assets before the borrower’s insolvency.

The impact of secured loans on the South African economy

In recent years, modernised loan/transaction laws and collateral registries have dramatically impacted economic development in many sectors. Collateral has provided the basis for free-flowing credit markets and reduced lenders’ default risk.

While land and building are commonly used as collateral for loans, the use of moveable collateral such (as inventory, accounts receivables, crops and equipment) is restricted because we do not currently have solid functioning laws and registries to govern secured loans.

Reforming the framework for movable collateral lending allows businesses, particularly SMEs, to leverage their assets into capital for investment and growth. Modern Secured Transactions Registries increase the availability of credit and reduce the cost of credit.

The South African government’s Covid-19 Loan Guarantee scheme boosts the economy

Starting 12 May 2020, the government loan scheme started. The initial banks participating are (Absa, First National Bank, Investec, Mercantile Bank, Nedbank and Standard Bank) which are ready to accept loan applications from eligible businesses that bank with them.

The activation of the loan guarantee scheme follows the finalisation of legal details by the National Treasury, the South African Reserve Bank and the Banking Association of South Africa.

The loan guarantee scheme is an initiative to provide loans, guaranteed by the government, to eligible businesses with an annual turnover of less than R300 million to meet some of their operational expenses.

Funds borrowed through this scheme can be used for operational expenses such as salaries, rent and lease agreements, contracts with suppliers, etc.

Government and commercial banks are sharing the risks of these loans. Initially, the National Treasury has provided a guarantee of R100 billion to this scheme, with the option to increase the guarantee to R200 billion if necessary and if thesysteme is deemed successful. Eligible businesses should contact theirprimarycentraln banker.

Government funding landscape according to SME South African Landscape Report of 

In the report: An Assessment of South Africa’s SME Landscape: Challenges, Opportunities, Risks and Next Steps

• The majority of small business owners are actively looking for funding
• 94% of them have never received any form of funding from the government
• Only 6% have received some kind of funding from the government
• Of the 6% of business owners who had received government funding, the largest share pointed toward government grants (21%) as the key funding mechanism.
• Business owners indicated that they have received funding from other government structures such as the DTI (17%), the NYDA (16%), SEDA (15%), and the GEP (15%). A small portion (13%) of these business owners indicated ‘other’ government avenues they have pursued to secure funding, including the Umsobomvu Youth Fund, the National Film and Video Foundation, and the Gauteng Department of Enterprise Development.

Government funding challenges

Lack of information/knowledge

Most entrepreneurs don’t know where to start when applying for finance. The funding world is largely foreign territory to them, and learning to navigate it can be challenging.

Difficult and frustrating process

Applying for finance is a daunting task. When you ask about Government funding, the common response is that they know there is funding available but that it is very difficult to secure.

Delay in the disbursement of funds

If you are successful, it takes forever for the funds to be paid to you, which often occurs after the opportunity which required funding has been lost.”

What are the possible solutions?

To combat this, recommendations in the Landscape Report are additional or improved support for SMEs looking to secure finance, including more information about SME funding to be made available, such as where it can be accessed and the requirements for each fund.

To address the lack of funding readiness, the report recommends that the government train and mentor business owners on business fundamentals, such as how to write good business plans, and integrate accounting systems and better manage their businesses.

Types of government funding available 

Grants

A grant is an award that is non-repayable; the government lending agency provides for 100% of the financial need. These types of grants are often once-off opportunities to assist new businesses. The receiving business is obligated to spend the funds in a manner specified by the provider.

Cost-sharing Grants

These grants do not provide for 100% of the financial need, they typically finance from 35% to 100% of the applications. The business owner must fund the balance of the finance required for the project.

Incentives

Incentives are paid after the event, unlike grants, where the money is provided for a project. Business owners are able to claim back the portion of the approved project that the incentive addresses. Like grants, incentives do not require that you repay the money.

Tax Incentives

A tax incentive means that the business may deduct a certain amount from the money it owes in tax. The government offers tax incentives to encourage businesses to engage in a specific activity (such as employing young people) for a certain period of time.

Equity Funding

In this instance, the government provides the business owner with finance to grow the business in exchange for a percentage ownership of the business, a share of profits, and a lump sum when they exit.

What you need to qualify for government funding

Requirements for funding always differ with the type of funding you are applying for. It is however important to comply with all the regulatory and statutory requirements like the CIPC and registered for tax with SARS.

General requirements

• Trading license
• Business plan
• Feasibility plan
• Strategic Plan

Key Financial documents

• Latest annual financial statements
• Last six months’ bank statement
• Tax clearance certificate
• Latest Vat statement
• Outstanding debtors
• Cash flow projection

Other supporting documents to confirm statutory compliance and to validate the information on funding applications:

• ID documents of owners
• Marriage certificates of owners (where applicable)
• Company registration documents
• Office lease or mortgage agreement
• Shareholder agreements
• Share register
• Proof of business address
• Relevant business licences, accreditations or registrations

National statistics on secured loans