Why are so many South Africans being rejected for loans? Most employed South Africans make use of some sort of debt. Many have a credit card and a store card or two, and plenty have personal loans. There are many middle-income South Africans that have a few types of short term debts coupled with either a financed home or vehicle. Debt is required for those purchases that cannot be funded with cash. Loans are also used for basic living expenses, which can be a dangerous affair.
Purchasing using debt is common practice the world over. A big issue in South Africa is debt reliance and over-exposure. More than half of the credit-active consumers in South Africa are in arrears on their accounts. This means that consumers are taking out more debt than they can afford to repay and are living beyond their means. This is due to poor financial literacy levels, easy access to credit and increasing living costs.
What Do Credit Providers Look At When Applying For A Loan?
In order to take out a loan, the credit provider will look at certain financial aspects. Credit providers will assess the following:
- Current debt repayment behaviour
- Credit history
- Credit score
- Affordability
- Net income
- Household expenses
- Consumer risk profile
The credit provider will draw your credit report and use salary slips and bank statements to verify your financial position. They will also draw up an affordability assessment to se if you can afford a new loan.
Why Would Some Credit Providers Grant A Loan But Not Others?
Each credit provider has a different target market and risk appetite. The big 5 banks give out loans as well as take in deposits from clients. The big banks are usually the strictest, meaning they will not lend to consumers who are very risky. This usually results in the big banks having lower interest rates as they know they are likely to recoup their money.
Credit providers, such as Bayport and Direct Axis, offer larger personal loans to clients. Due to the size and competitive interest rate, they are also strict on the criteria and look at higher credit scores. These credit providers have variable interest rates depending on a clients risk profile.
Smaller, short-term loan providers and payday lenders are the easiest lenders to get loans from. They take on more risk and subsequently charge the maximum interest rates and fees. They therefore are compensated for this risk.
Why Would A Credit Provider Not Grant A Loan?
Affordability:
There are a number of reasons why you could be refused a loan. When credit providers do an assessment of your financial position, you may lack affordability. This means that they have calculated that you would not be able to afford the repayment of the new loan. They have a look at your income, expenses and other debts to assess this.
Credit Score:
Another reason may be a low credit score. A credit score is calculated using a number of variable factors. Mainly, the credit bureaus look at payment history, debt exposure and debt usage. If you have missed many repayments and have any defaults or judgments on your account, your score will be low. If you pay your debts on time and don’t have a lot of loans, your score should be higher. TO build a credit score, however, you will need some debt to prove your payment behaviour and calculate a risk level.
Blacklisted:
Although there is no such thing as the black-list, being blacklisted is a term used when your are unable to get any more credit. This usually happens when your credit score is low and there is a lot of adverse information on it. By having legal action and other defaults to your name, you are likely to be refused new credit.
So, What Can You Do To Get A Loan?
If you have been rejected by a number of credit providers already, here’s what you need to do:
Draw your credit report from one of the bureaus (TIP: they give you one free credit report every year through their websites). You can use Transunion, Experian, XDS or Compuscan. Have a look to see if there is any old debt or unusual items being reported. Your older debts may actually be prescribed, which you could query with the credit provider. Make sure that all of the information is correct on your credit report. If there are issues, query with the credit provider in question.
If you have debt in arrears you need to catch up on those missed payments. If you miss too many payments, other credit providers are not going to lend to you. They would then think that you may miss their repayments. Try to settle your judgments and defaults early.
Once your credit report has been cleaned up and is up to date, you will need to continue paying everything on time for a few months. It can take a long time to improve your score, there is no hard and fast way to do this. If you don’t understand your credit report or have too much debt to sort out, speak to a debt counsellor. A debt counsellor will give you expert advice and assist you with your debt problems.
A debt counsellor can offer you debt solutions to help you manage your debts, consolidate payments and make them more affordable for you. Getting a professional opinion can help you understand your options.