Almost everyone needs a loan at some point. It could be as informal as borrowing R50 from a friend to pay for a meal, or as formal as signing a multi-page loan agreement with a bank or a micro lender. Whatever the circumstances, you must always make sure to avoid bad debt when you borrow money.
People have been borrowing money for thousands of years. Before there were banks, loans were informal arrangements, usually between people who knew each other. Sometimes collateral was required, and sometimes not. Interest was charged, people got into bad debt, and some credit providers used rather brutal methods to get their money back.
The arrival of the formal banking system gave people other options when it came to financial services, and these days institutions are increasingly regulated to protect consumers.
However, many people in developing countries – such as South Africa – find it difficult to access formal financial services, and even those who can open an account or take out a formal loan, still sometimes prefer to go the informal route.
Let’s take a closer look at formal vs informal lending, and the factors you should consider when opting for one or the other.
In simple terms, formal lending takes place between two parties who have a business relationship and always involves a written contract. It can be an unsecured personal loan or a loan for which you have to provide collateral. Formal loans are usually provided by a bank or an unsecured credit provider, but can also be in the form of a store account.
An informal lending agreement is most often between people who know each other – such as friends or family members – and very seldom involves anything in writing. You can also get an informal loan from someone you don’t know, also with no paperwork involved. These lenders are called loan sharks or mashonisas, and they are the dark side of informal lending.
Informal loans can be extremely handy, especially when you need the money for a very short period of time, and you know you can pay it all back within a few months, or even a few days. In any other circumstances, a formal agreement is always better.
Of course, first prize is that you should have an emergency fund that you can use, instead of borrowing money. If you don’t already have one, start saving money (even if it is just a small amount) right away.
For more information on personal loans, visit https://www.bayportsa.com/products-services/personal-loans-online/
For more information on personal loans, visit https://www.bayportsa.com/products-services/personal-loans-online/Go back