Information banks need to grant a loan
"When you apply for a loan, the bank assesses your credit worthiness by doing a number of checks," says Theunis Kruger, head of unsecured lending at Standard Bank.
"The bank doesn't only look at how much you earn; your spending habits and behaviour have a big impact on your credit profile, too."
When looking at a customer's ability to repay, banks don't only look at your nett take home pay, but they also consider your expenses, employment, and your ability to repay the loan, taking into account the repayments on other debt you might have as well as your living expenses.
Another important aspect of credit approval is your credit profile. There are a number of credit bureaus in South Africa that keep records of your credit profile and develop your credit score. Banks, insurance companies, retailers, estate agents and employers subscribe to their services.
Credit behaviour
They not only request information on clients, but also provide information on your credit behaviour, meaning that every loan or credit agreement you have is monitored.
If you pay your bills regularly, you will have a good credit profile. If you miss or are late with payments, this will reflect negatively.
It is advisable to review the accuracy of your credit report before you apply for credit. You are entitled to one free report from the credit bureaus each year.
"If you have an adverse report for unpaid debts, or if it is inaccurate, it's important that you resolve any issues and have the report updated as soon as possible," says Kruger. "If you have a judgement where the creditor has gone to court and issued a court order, a specialist attorney can assist you to get the judgement revoked.
Once you know your credit profile is accurate, you can apply for a loan, just make sure to double check that all the information you give the bank is correct, or you could run into financial difficulties in the future, specifically if you took out a loan you could not afford."
Relevant documents
The final step to securing a loan is proving that you have all the relevant documents to back up your claims. Your bank needs to understand what you own, what you owe as well as what you earn and spend. They will ask you for the following, depending on the type of loan you apply for:
- Most recent payslip.
- Three months' bank statement if you are not a customer of the bank or financial institution.
- Identity document.
- Proof of residence.
- If you have accounts that are paid but still open, close them. The bank will see them as a line of credit.
- Examine the purpose of the loan carefully. Using a loan for studying is a good reason as it would improve your future earnings potential. Similarly using a loan to fund home improvements will increase the value of the house. Using a loan to pay for groceries however, is not a good idea as the debt repayment will last long after the groceries have been consumed.
- Always pay bills on time. Even late payments are recorded at the credit bureau.
- Make sure your details are up to date at the bureau.
- Protect yourself against identity fraud. Get a copy of your report each year to ensure that someone is not using your details to get credit.
Kruger suggests the following tips to build a good credit record and keep the payments affordable:
If you are declined for a loan, ask the consultant why. This will enable you to identify what you need to change to qualify for credit in future.
"Banks have to comply with the National Credit Regulator rules of responsible lending; if you get a loan that you can't afford to repay, it may result in you being over-indebted. If you manage your debt responsibly, you will always have access to credit when you need it the most," concludes Kruger.