First-Time personal loan application

Applying for your first personal loan can seem like a daunting and confusing process, and those are perfectly natural emotions to experience. In this article, we will explore all the ins and outs of what is required to make your first loan application as smooth as possible!

What to know before you apply for a personal loan

Know what amount you require and why, as well as how much you can afford to pay back:

In order to take out a loan, you first need to determine whether or not you are in a financial position that allows you to afford the monthly repayments and avoid debt. To calculate how much you should loan, take a step back and review your overall income, expenses as well as your general cash flow. Once you have gathered this information, it can be used to determine the monthly amount you can afford to pay back, as well as the period of time by which you can continually make the payments.

This enables you to have discussions with lenders based around agreeing on loan terms that suit both parties. Once the agreement has been reached, you will have a clear picture of your payment schedule going forward once the process has been completed. During the negotiations, it would be wise to discuss the total amount you will have paid back for the loan in a long-term view. This includes the total cost of the loan including the interest and other fees that will allow you to plan your future budgets accordingly. Lastly, discuss the type of loan you will receive as different loans have different repayment obligations.

The Ultimate Loan Guide help you navigate the process as well as shed light on the different types of loans that would be best suited for certain needs.

Check your credit score:

Before you apply for a loan, assess your credit and financial situation. Your credit report can help understand what you would need to do and how to increase your credit score. South Africans are entitled to one free credit report from any of these credit bureaus; TransUnion, Compuscan, Experian, and XDS (Xpert Decision Systems).

Visit their websites to access your free credit report and assess how you can improve your status if needed.

Visit our article on what credit score is needed for a loan for more insight.

Documents and information required

Find a list of the required documents and information required for your loan application below:

• Your most recent payslip or a letter of employment if you are a contract worker.
• Three months' stamped bank statements.
• Proof of residence no older than 3 months
• Valid South African ID
• Employers contact details

What factors are considered for loan approval?

Outstanding balances: Outstanding balances are an important factor that lenders analyse when you are applying for a loan. Lenders use these balances to calculate your credit utilisation rate - the ratio of your outstanding credit to your actual credit limit. It is important to avoid the mistake that many people make in terms of misunderstanding the ratio and presenting lenders with an outstanding debt as 0. Lenders may see this as a sign that you are not financially capable of repaying the overall loan amount as you are seen as a user that will not have a need to take out further credit - making you a less ideal candidate overall. It is strongly recommended that you keep your debt as low as possible, but not zero.

Your income: What you earn needs to cover both your debt repayments as well as your usual monthly expenses. This shows lenders if you can afford to have a loan and if you will be able to pay it back.

Payment history: Arguably the most important factor that lenders look at when you apply for a loan, your payment history in your credit score is used to determine whether or not you have completed all of your repayments on time. In the event of delayed payment, lenders see it as the longer you took to pay it back in full, the higher the negative impact it will have on your credit report.

Requirements set out by the National Credit Act: Interest rates are personalised up to a maximum of 24.5%. The good news is that a good credit score could get you a better interest rate. Learn more about NCA and how it affects you.

What to do if your loan application was denied

• Ask why your application was denied – Reasons may include things like a low credit score or perhaps you do not possess enough verifiable income for lenders to determine whether you are a safe applicant or not.
• Look at your finances from the lender’s point of view - Check your credit report to get an idea of your overall financial position, and check the debt-to-income ratio to further determine.
• Make quick fixes to increase your chance of approval - Pre-qualify with multiple lenders. For example, you could ask a close friend or relative to be a co-borrower on your loan in the event that you need help building your income and cash flow to meet the lender's requirements.
• Make long-term changes to your finances – These could include drawing up a budget that will allow you to build a thinner credit report, increasing the appeal of your account when it is being reviewed for your loan application.
• Reapply in a month or two after adjusting the above-mentioned information to give you the best chance to secure your loan application

Improve your credit score

Listed below are a few suggestions you can adopt to start improving your credit score today:

• Build up your credit file by applying for a credit card (or paying off your existing one best you can), regularly check your credit reports for errors or even increase your existing credit limits.
• Don’t miss payments as this shows lenders that you are a trustworthy borrower who pays expenses on time consistently.
• Catch up on past-due accounts. This will reduce your overall debt and improve your eligibility as an ideal candidate for future loan requests.
• Limit how often you apply for new accounts to stop you from spending unnecessary funds.
• Before you begin applying for a loan, make sure that other debts have been paid off and with early payments preferably.
  Manage your cash flow by not overspending and having more than one income stream.
• This will allow you to keep on top of payments on your credit cards, etc. and start building up your credit score.

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