How do lenders assess your loan application?

 

 

the difference between secured and unsecured credit.

In our last article, we had a look at the history of credit, as well as the different types of credit available in South Africa, with a special focus on the difference between secured and unsecured credit. When it comes to secured credit, given the security of an underlying asset that has value, the lender offers better interest rates on the debt and the debt is normally for a longer term. Typically, cars are paid off in 5 years and homes over 20 years. There are a range of factors that determine the terms of a loan. Banks and financial service providers have different criteria and requirements.

 

what do lenders look for when you apply for a loan?

When assessing your loan application, the lender is trying to gauge whether you’re a safe bet to loan money to. Generally, they will be interested in things such as: your employment and employment history, your net disposable income, your current debt repayment, whether you are an existing customer, a consumer risk profile and you will be evaluated through a credit score and an affordability assessment. These factors, as well as market-related factors will be determinants of your loan and the interest that you will have to pay. We will touch more on this in next week’s article.

what’s happening locally?

Some reports refer to South Africa as the world’s capital for borrowing. We are seen as a nation that collectively struggles to manage its credit. Fortunately, regulation in South Africa is shifting to protect the borrower. Regulation in South Africa has taken a hard-stance on P2P lending markets. Section 40 of the National Credit Amendment Act 19 of 2004 stipulates the specifications of who can be a credit provider. In 2014, the lending threshold was R500 000 and in 2016, this was changed to R0. In short, any person who intends on loaning money with a credit agreement, must register as a credit provider.

 

why do south africans struggle to manage their credit?

There is still a lot of work that needs to be done. There are some lenders extending credit to those who do not qualify for it and can’t afford to pay back their debt – known as reckless lending. For perspective, studies have found that almost 40% of borrowers have impaired credit records. This means that they’re struggling with their repayments. Almost 70% of the credit in South Africa is unsecured and relates to credit cards and store accounts. So, most of the debt in South Africa is at high interest rates. This makes it expensive for borrowers and many are unable to pay back their debt.

what about people who use credit responsibly?

There are hordes of borrowers who have used credit responsibly. They use credit to get themselves an education, start a business, get themselves through the month or pay for a medical emergency. The list goes on, but the takeaway is that credit can be used to your benefit when you manage it responsibly. Are you looking to apply for a personal loan to make your dreams a reality? You can get a personal loan through Virgin Money here.

 

The way that you manage your credit can influence the rest of your life and your ability to get other credit in the future. In later articles, we will share ways that you can manage your credit responsibly, such as: how to keep track of your spending, advice on making payments and tips and tricks to building a healthy credit history. However, the first step to managing your credit responsibly is to know your credit score. Knowing your credit score is part of responsible borrowing so you know what you can and can’t afford and also avoids lenders taking advantage of you by charging excessive interest rates. If you haven’t already, get a free credit score here and start borrowing responsibly.

 

 

Join us next week as we dig deeper into how lenders decide who to lend money to and how much.

 

Secured, unsecured, bond, credit card? What does it all really mean?

 

What’s the history of credit?

Consumer credit is believed to have been invented in 3500 B.C. Originally thought up by the first populous city, Sumer. Loans were issued for agricultural purposes to help people start farming themselves. Modern day formalised credit only popped up in 1919 when the introduction of the consumer car by Ford made instalment financing necessary to allow consumers to pay off larger items over time.

From there, the credit boom started. Through the ages, variations of credit have sprung up to help consumers bridge the gap in financing their expenditure while managing their daily cashflow needs to maintain their lifestyle. The availability of this credit ultimately promotes spending – which allows consumers to forgo future consumption for today’s needs.

 

What Type of credit products are out there?

Broadly speaking, you get two forms of credit in South Africa – secured and unsecured. The difference relates to what security the lender has over the money they’ve lent you. Consider a bond to buy a house – if you miss repayments on your bond and are no longer able to afford them, the lender can sell your house to pay back the loan. This process is what you see at auctions as banks try to offload assets. They do this to settle their debt as a result of a consumer defaulting on the repayment. In this example, the house was the security to the lender. In terms of vehicle financing, the car is used as collateral should you be unable to repay the loan.

 

What about unsecured credit?

“Unsecured” credit implies the lender has no security to hold on to and is therefore at higher risk. The lender may charge higher rates and keep loans shorter in term to avoid opening themselves up to greater risk. Credit cards, store accounts and personal loans all fall into this category. In order to contribute to the remaining balance on your credit card, you will be required to pay a minimum monthly amount. Credit cards and store accounts enable purchases that have limited to zero resale value – think clothing, food or experiences funded by credit. With personal loans, you must pay back the loan in monthly instalments, but with an added interest rate.

 

Tell me about credit repayments 

If we dive a little deeper, there are two central types of credit repayments. Firstly, there is installment credit. Installment credit is distinguishable by the prearranged length and end date of the credit account. With installment credit, there is usually an agreement which states a repayment schedule. Your primary amount is reduced every time you contribute to the repayment. You will know how much you have to pay per month and for how long you will be required to make these payments.

With revolving credit, credit cards are probably the most identifiable type. With revolving credit, the credit limit does not change once you make a payment. You can continuously go to your account and borrow additional money, as long as you do not exceed your maximum. You can borrow up to a certain amount, but because of this flexibility, there are often lower borrowing amounts and higher interest rates.

 

Which credit repayment method is better for my credit score?

Revolving credit is typically a riskier way to borrow in comparison to installment credit. This is especially true when taking your credit score into account. Your credit utilization rate makes up a significant share of your credit score. Your credit utilization rate looks at your overall limit of each card and how close your bank balance is to this limit. Therefore, if you are carrying high balances, your credit score will drop. It’s in your best interest to find out your credit score so that you can manage and understand your current credit utilization. You can get a free credit score here so that you can manage your credit.

 

 

Join us next week as we dig deeper into the credit space in South Africa and how lenders manage their debt.

Is taking out a personal loan going to be good for my future?

 

Too often, the idea of a loan is met with negative associations. This is because people view the need for a loan as a direct result of poor financial management or overspending. This is certainly not the case. A loan can in fact be a person’s investment in their future.

 

When should you not take out a loan?

Why should you put your hopes and dreams aside when a personal loan could help you realise your aspirations? However, there is a big distinction between taking out a loan for the right reasons and taking out a loan that could harm your financial wellness. If you’re taking out a loan to pay off existing debts, you could be doing yourself far more harm than good. In this situation, you should be talking to your credit providers and working with them on a plan to reduce your debts without having to put yourself deeper into debt. Responsible lenders should be able to work with your specific challenges and provide solutions that reduce your debt burden.

Why should you take out a loan?

On the other hand, taking out a loan to further your or your children’s education, make some home improvements or to support growing your small business – these are good reasons to look at taking out a personal loan, as these things all contribute to improving your financial wellness in the long term.

Why a personal loan?

A personal loan is exactly what it says it is. It’s for “personal” use to improve your personal financial wellness. It’s also a relatively simple type of loan to apply for. Two key factors that come into play here is your credit score and your income after you have paid for all your expenses (disposable income). Just imagine the opportunities that a personal loan can create for you. It may just be a loan today, but it could mean that your child gets the best education possible; you finally manage to make those much-needed home renovations or upgrade the car for the growing family.

The important thing to remember is that a personal loan should only be taken to help grow your future and not as a means of paying off debt, as this could lead to a problematic future. All you need to do is ask yourself, “Is this personal loan going to create opportunities for me and am I going to be better off down the line?”

Still not sure about what a personal loan can do for you?

 

Here’s our top 5 reasons why a personal loan could be good for your future:

 

 

Invest in yourself 

Whether you’re planning a business endeavour, you want to give your kids the best education opportunity or maybe you’re even considering advancing your own education – a personal loan can help you quickly get started in the right direction.

 

Paying for education

This is undoubtedly a way in which a loan can help to pave your future. Your education is a vital piece of the puzzle and you may need help to pay for the associated fees. Imagine: going to school, getting into the university of your choice, getting hired straight out of varsity, moving to your dream job, climbing the corporate ladder and becoming CEO – none of which would have been possible without that initial loan for your education

 

Home makeover

Taking out a personal loan to finance your home improvements is a good option. Whether you want to fix up your kitchen, add a bedroom for your growing family, install solar panels or even do some general maintenance, a personal loan can help make your dream home a reality.

 

SOS

Often, accidents or emergencies don’t give us any warning, so you may not have the necessary funds on-hand to be able to deal with this. That’s where a personal loan can swoop in and save the day. Personal loans can be granted relatively quickly; therefore, they could be used to efficiently finance an untimely emergency.

 

Adding to the pot

If you’re a business owner, you probably already have some type of funding. However, you may reach a point where you need additional funding in order to grow your business. In this regard, taking out a personal loan is an effective way to supplement your current funding.