Lenders look at several factors when determining whether to grant you a loan. We explore these criteria, and offer tips to improve your eligibility as a borrower.
12 August 2024 · Fiona Zerbst
We explore the loan qualification process, provide the tools you need to determine your chances of approval, and offer tips for improving your eligibility.
Tip: Instantly check whether you may qualify for a personal loan, with JustMoney.
Getting a loan is a privilege, not a right. Being able to apply for credit doesn’t mean you qualify for it or can afford it.
When applying for a loan, it’s essential that you understand the criteria lenders use to assess your application, says Ayanda Ndimande, strategic business development manager: retail credit at Sanlam.
“Once you know more about the loan criteria, you can take steps to improve your chances of qualifying. However, this may mean changing your financial behaviour,” Ndimande notes.
There’s no quick fix – improving your financial position takes time. It’s worth it, however, as loans can provide access to finance in an emergency, or allow you to secure an asset, such as a car or a home, among other substantial benefits.
Once you understand the loan eligibility requirements, you can set about meeting them.
The most common loans available in South Africa include:
Personal loans. These are unsecured loans that allow you to fund anything from home renovations and school fees to unexpected medical bills, and they can enable you to consolidate your debt. They usually have fixed interest rates and repayment terms, so you’ll know exactly how much to budget for every month.
Vehicle finance. Vehicle finance is specifically intended to help you buy a car. These loans are secured, as the car is tied to the loan. The amount granted depends on the price of the vehicle, your credit profile, and the lender’s policies. Some lenders finance up to 100% of the car’s value, while others may ask for a deposit.
Home loans. Many prospective homeowners need to take out a home loan to purchase a property. These are secured loans with longer repayment terms of up to 30 years, and lower interest rates than other loans.
To improve your chances of success, it’s important to know what will be required from you, and the criteria your prospective lenders will use, before you apply for a personal loan.
Under South African law, you must be at least 18 years old to qualify for a personal loan, says Ndimande.
However, lender-specific age criteria may also apply. If you’re a first-time home buyer, for example, a bank may require you to be at least 35 years of age, and not older than 60; and in some cases, you will need an NQF level 8 qualification, or higher.
Meeting the age requirement doesn’t guarantee loan approval. Younger applicants, in particular, may lose out because of a limited credit history.
In most cases, you’ll also need to be a citizen or permanent resident with a valid South African ID. This is because lenders need to verify your identity, credit history, and financial stability before they lend you money.
In lieu of a valid South African ID, some lenders may consider your application on submission of a foreign passport, proof of South African residency, or a work permit.
To improve your eligibility to qualify for a loan, follow these steps:
Your credit score has a significant impact on your loan eligibility. Generally, a good credit score makes loans more accessible and affordable.
Lenders will examine your credit history, which indicates how responsibly you manage credit. If you pay amounts owed in full and on time, you can achieve a favourable credit score, which increases your chances of loan approval.
A higher credit score also makes it easier to secure a lower interest rate, says Ndimande, potentially saving you thousands of rands over the life of your loan, especially for a large sum such as a home loan.
It also helps you secure better loan terms, for example, a higher loan amount or longer repayment term.
The categorisation of a credit score as “good” varies between lenders. Those with a bigger risk appetite may be satisfied with a lower credit score.
Credit bureaus and other institutions use different scoring ranges. TransUnion, for example, applies scores ranging from 0 to 999, while Experian scores fall between 1 and 657. On JustMoney, credit scores range between 1 and 1,000.
In general, the higher your credit score, the less likely you are to default, and thus the lower the risk you pose to lenders.
Your credit history indicates your borrowing behaviour. It shows how well you’ve managed credit in the past, and whether you repay your debt reliably. It generally counts for about 35% of your credit score calculation.
If you’re late to pay even one instalment, your credit score may drop and your lending options may diminish. By contrast, good payment behaviour, such as paying early or on time, or contributing more than the minimum amount required, will work in your favour.
A lender wants to know that you can pay consistently and service different types of debt, including your household utilities, credit cards, personal loans, and more.
Having a bank account increases your chances of having a loan approved.
Ndimande explains, “This is because it’s an indication of regular income – but, more than this, it allows lenders to examine your expenses, which informs your ability to afford loan repayments.
“You also need a bank account to set up a debit order to collect the monthly loan instalment,” Ndimande points out.
In terms of assessment, a bank account tells lenders whether you have a steady cash flow, you pay your bills on time, and you can manage your money responsibly. A positive account balance, few or no overdrafts, and some indication of saving activity can all be gleaned from your statements and will stand you in good stead for loan eligibility.
A lender cannot ask for collateral – that is, an asset as security – on a personal loan, says Ndimande. This is because a personal loan is a form of unsecured credit.
“However, there’s normally credit life insurance included in the loan, which covers the lender in cases where the client can’t repay the loan, such as death, disability, or retrenchment,” she points out.
“Lenders also have their own credit policies to reduce risk exposure,” she adds.
Collateral is typically needed when a borrower takes out a large, long-term loan, such as a home, vehicle, or business loan. In these instances, the loans are secured by an asset.
There’s a lot you can do to improve your chances of qualifying for a loan, says Ndimande. Simply improving your credit score can go a long way towards making you a more eligible applicant.
“If your score decreases, take action – look at your budget, pay off your biggest debts first, don’t take out extra credit while doing this, and never skip a payment,” Ndimande recommends.
“In a financial crisis, talk to your credit provider to find a solution to pay off your debt, over a longer period and in smaller amounts. You can never make a mistake by engaging with a financial adviser or credit management coach to help you get back on track.”
It’s essential to know your credit status so you can take steps to improve it. This means checking your credit score at least once a month and ensuring all the details in your credit report are correct.
Tip: Keep your credit score healthy by meeting your financial obligations timeously.
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