With more and more South Africans looking to borrow money, financial institutions have their pick of applicants. Where they might have been willing to hand loans out left, right and centre in the past, they can now afford to be selective.
With an increased demand for loans comes a smaller supply. There is only so much money that banks can lend out, so why would they lend it to people who present a repayment risk?
For this reason, applicants are intensively screened to discern those likely to repay the debt from those that aren’t. Banks are requiring applicants to jump through more hoops than ever to secure financing for personal lines, vehicle finance, and bonds.
What are banks looking for nowadays?
- A solid credit score
Your past financial behaviour is a good predictor of your future actions. People who have paid off previous loans are a better prospect than those that have not. Each time you default on a payment, it affects your credit score.
A reduced credit score is not only related to loans from the bank. A failure to pay store card debts, municipal accounts and cell phone contracts, among others, also count against you.
Once the bank has done a credit score check, they will advance you to the next level of the application process. Financial institutions have other criteria you are expected to meet.
Action:
- You’re entitled to one free credit check annually. Take advantage of the opportunity.
- Whenever a financial institution wants to run a credit check against your name, you have to give permission. If you refuse, your application will be rejected.
- If you see your credit score has declined, investigate the reasons immediately.
- Someone might have stolen your identity and used it to incur debts you weren’t even aware of. There might be a mistake, and you’re being held accountable for a debt that isn’t yours.
- Proof of income
It’s vital that you can prove you are employed if you want to secure a loan of any kind from the bank. Even payday loans of small amounts require you to show that there will, in fact, be a payday in your immediate future. Payday lender LittleLoans, like most other lenders, insists on three months’ payslips from applicants.
Without proving that you have an income, it might be difficult to secure a loan from a formal lender. Your proof might not need to take the form of payslips. If you earn money from an investment or a trust, you need to secure written, reliable evidence to offer the bank. Your application will still be considered, provided you can prove that you have a regular income.
The bank wants to see how much money you make monthly. This amount allows it to assess whether or not you can afford the repayments. If you are earning a low salary, you’re unlikely to secure a big loan. The ratio of your repayments is compared to your take-home pay. If the percentage is high, you cannot afford the repayment, and you will likely default on the loan.
Action:
- Have the documents the bank needs at your disposal. Delays in supplying them won’t do your application any good. It could be construed as you wanting to hide something.
- Employment history
Your loan application has a better chance of success if you’ve been working for the same company for a while. It shows that your income is stable. If you’ve only been working at an organisation for a short time, you might still be on probation. That means you could easily lose the job and have no income with which to pay off the loan.
The bank might phone your employer to confirm that you work there and the tenure of your employment. It’s possible that a financial institution could ask for verification of your salary to make sure you’ve been honest in filling in the application.
Such calls are usually referred to the Human Resources or Salary departments of the organisation. The bank might request that confirmation of your employment is provided in writing by your employer.
Action:
- Supply the bank with all the details it needs. You can forewarn the relevant person at your organisation to expect a call from the institution regarding your employment.
- Your budget
When you fill in an application for securing a loan, you have to supply the financial institution with a breakdown of your income and expenses. This is another way the bank assesses whether or not you have enough disposable income to pay the instalments.
Action:
- Be honest and realistic when laying out your budget. For example, don’t exclude groceries from your budget. It makes it glaringly obvious that you’re understating your income to get the loan. This creates uncertainty about your ability to pay back the money you owe.
- If you are married or cohabiting, make it clear in your budget that you share the expenses. The bank might ask you to supply details of your partner’s income and expenses to make sure you have submitted an accurate budget.
Final advice
Given that the competition for securing a loan is so stiff, it’s essential that you make sure you do the following:
- Be transparent in your application. If you try to conceal the truth and the bank finds out, your application will be denied.
- Give the bank the relevant documents without delay.
- Be prepared to be subjected to a lot of checks before the bank approves your loan. It may take a bit of time to secure the money you’re asking for.
- Understand that you might not be approved for the full amount you’re requesting. The bank might decide that you qualify for less than you’d like.
