Before you apply for a personal loan, you should first check if you’re actually in a position to be applying for one. A personal loan can be used for a variety of things such as: home renovations, trips and emergency expenses. Below is a list of 8 things you can do before applying for a loan to improve your chances of getting approved.
1.Check your credit report
Your loan application will immediately be rejected if you have a debt review flag on your credit report. Did you know: you could have a debt review flag on your credit report without even knowing.
Get your free credit report here to check if you’ve been flagged as being under debt review.
2.Check your affordability
According to the National Credit Regulator, credit lenders can only lend consumers (you) money if you can actually afford to pay it back.
What is affordability and how do banks calculate it?
Banks use different methods to calculate whether you can afford a loan. Affordability usually comprises several factors including, but not limited to:
- Debt-to-income ratio
- This figure refers to the disposable income you have after having paid all your debts as well as your daily expenses.
- Risk profile
- A bank will look at your credit report and your credit history. Whether you, for example, have made consistent payments for your existing debt, and whether they’ve been on time or late each month. If you haven’t, this will negatively affect your credit score.
With your credit report it’s important to note that in South Africa, there are different credit bureaus, and this could mean that you have a different credit score with each.
How do you know which credit bureau is most accurate?
The short answer is: you don’t. You can, however, choose to rely on credit information compiled by the largest and oldest credit bureaus like that of TransUnion and Experian.
Different banks have different methods, and prioritise different information when calculating a consumer’s affordability. This is in part why, for example, when you apply for a home loan at different banks, they usually offer you different:
- Interest rates based on the principal amount
- Sometimes even different amount they are willing to lend
When it comes to affordability, another big consideration when applying for a loan is accepting that just because you have been approved for a particular amount, does not mean you can really afford that amount. Lying about how much you spend on expenses like groceries and fuel, for example, will not help when you are faced with the reality of just not having enough available cash to pay the loan.
It’s important to be honest with not only credit lenders when making a loan application, but with yourself too.
A good rule of thumb is to apply for a loan amount less than what you can actually afford. This means you have a buffer for situations when there is an increase of the repo rate and you have to fork out more money for the loan each month.
Read: What the increase of the repo rate by 50bps points means for you
Remember, when applying for a loan, you must agree to the repayment terms including: the monthly installments, the interest rate on the loan, and the loan term (time period you will be paying the loan for).
Get a FREE, complete financial overview of your financial health status including:
- Your affordability level
- Your credit score
- Your debt capacity (your ability to meet your repayments of your debt)
Green circles means you are in a good position. Red circles means that you can work on improving your current status.
Register for a free financial assessment with Meerkat here.
3. Ensure you are making all your current debt repayments on time each month
This will help you with improving your credit score. By showing that you are able to manage your current debt obligations, you indicate to credit lenders that you are a good debtor.
4. Pay up or reduce your current debt
Because your affordability is in part based on your ability to finance and repay your current debt, by reducing this debt, you will increase your disposable income, which in turn, will increase the capital loan amount you can be approved for.
Moku tip: Another way of increasing the loan amount you can be approved for is by increasing your income. You can do this by either getting a side hustle, a job promotion, or looking at a company that offers a more competitive rate in your industry and line of work.
Very important is that if you have been rejected for a loan, DO NOT reapply or apply to different banks. This is seen as a red flag with banks or credit lenders and several loan application rejections will negatively affect your credit report.
5. Sign up for debt review with Meerkat
Did you know that one way to rehabilitate your credit score is by going under debt review? By going under debt review, you not only pay up your debts, you also show that you can consistently pay them each month.
A common myth when going under debt review is that you will not be able to apply for credit once you leave the process. This is simply not true. You are actually in a better position to apply for a loan once you have successfully completed the debt review process.
Read: How long after debt review can you apply for credit?
6. Consider having a co-signer for the loan application
Depending on the credit lender and the loan-type you are applying for, you can get someone with a good credit score and better affordability, to co-sign for the loan with you. This may put you in a better position when being approved for the loan.
7.Ensure you have a steady income
Banks will look at your employment history and consider how long you have been receiving a consistent income. Of course, to be able to repay a loan, you would need to show that you have a consistent form of income coming in each month. This could be in the form of employment or self-employment.
8.Ensure you have a credit history
While having too much debt is a cause for concern for potential lenders, not having any debt is also a concern. By not having any debt, you do not have a track record of how well you can keep your credit agreements. This means that credit lenders do not have any proof that you will be able to consistently make payments for your loan.
Moku tip: An easy way to improve your credit score is by opening a store (retail account) or credit card and making consistent payments for at least one year before applying for a loan.
List of requirements when making a personal loan application
The list of requirements when making a loan application will vary by lender, but below is a list of some of the main requirements:
- South African ID
- Copy of 3 months bank statements
- Proof of residence that's not older than 3 months
- Proof of your monthly payslip