Explainer – how and why personal loans are approved or not
Used judiciously, personal loans can be a useful financial tool to pay for tertiary education, upgrades or extensions to a home, to start a side hustle, deal with life’s unexpected emergencies or even consolidate your credit to make it easier to manage.
The application process should be quick and easy and unlike vehicle or home loans, where there’s an underlying asset, personal loans are unsecured.
But how do you know if you’ll qualify or if you’ll be able to borrow the amount you need?
Neven Narayanasamy at specialist loans provider, DirectAxis, which has been providing personal loans for over 25 years, explains what loan providers take into account when considering a loan application.
“When you apply for a loan, it’s important to understand that there are legal safeguards in place that put the responsibility on the credit provider to ensure you can afford the loan. The laws are there to protect consumers.”
When you apply, the credit provider first checks your credit score. They get this from one of the credit bureaus. These are companies that compile and track information about consumers’ financial history including whether you pay your bills on time, how much debt you have and how your financial profile compares to that of other consumers.
“Most people don’t know or don’t bother to find out what their credit score is, so it can come as a surprise when a loan application is approved for a lesser amount or not at all. All South Africans are entitled to a free credit report for any of the credit bureaus. There are also plenty of free tools which allow you to check your credit score, including DirectAxis Pulse, a financial wellness tool that enables you to check your credit rating and how to improve it,” says Narayanasamy.
Amongst the documentation required such as proof of identity and proof of residence, credit providers will also ask for proof of income. Your latest payslip and bank statement or, if you’re self employed, bank statements for the past three months.
This information is then used to calculate whether you can afford the loan for which you are applying.
Narayanasamy says it’s essential to provide accurate information, not to conceal any debt or other financial obligations, and answer any questions honestly.
“It’s in nobody’s interest to lend you money you can’t afford to repay. While you may be disappointed if the loan or amount you asked for is not approved, it’s certainly better than subsequently finding you’re overindebted.”
When applying for a loan it’s important to understand:
· What the fees and interest rates are and how much you’ll have to pay each month so you can make an informed choice.
· How long you have to pay it back – also known as the term of the loan. Personal loan repayment terms are typically between 24 and 72 months.
· No matter how much you feel you need the money in the short term it’s better not to have a loan approved than to be burdened with a debt you can’t repay.
Narayanasamy says if your loan application is not approved, there are things you can do to improve your credit score. The first of these is to pay your debts on time. Even paying a few days late can affect your score.
If, like most people, you have a number of different debt commitments you can use the credit report to prioritise repayments. Try to pay off the debt with the highest interest rates first, while maintaining the minimum repayments on other accounts. Over time as you settle debt, it should reflect positively on your score.
Signing up to an online tool such as DirectAxis Pulse will help you track progress.