Personal loans – will you qualify for the amount you need?

Handled well, a personal loan can be of great benefit, whether you’re facing a crisis, furthering your goals, or consolidating your debt.

The loan amount for which you qualify will be determined by various factors. We examine what these are in order to assist you ahead of applying.

Tip: A personal loan from a reputable provider can solve various financial needs. You can learn more here.

Do you really need a loan?

Before applying for a personal loan, it’s important to consider your reasons. Will you use it for a productive purpose, such as funding your studies or renovating your home, or is there a risk that you will spend it frivolously?

Nick Nkosi, executive head of unsecured lending at Absa, cautions against the latter.

“A personal loan can be very useful if you need extra money during a medical emergency, or you want to consolidate your debt - but don’t apply for funds because you want to keep up with the Joneses,” he says.

Ayanda Ndimande, strategic business development: retail credit at Sanlam, points out that a personal loan can help you acquire assets that are difficult to purchase with cash. However, it’s preferable to save diligently for these, as personal loans tend to attract high interest rates and fees.

How much can you borrow?

You may assume you’re entitled to request any amount you need from a personal loans provider, but this isn’t how lending works, notes Nkosi.

“A responsible lender will look at affordability - that is, your ability to repay the loan,” he says.

“You may require R100,000, but if a lender looks at your income and expenses, and the funds that remain to service your debt, you may only qualify for 10% of this.

“Ask yourself if you’ll be able to make the repayments if the interest rate goes up again,” Nkosi says. “Although a 2% increase doesn’t seem like much, the amounts add up when you tally all your expenses - your bond, rates, school fees, and so on.”

If a lender denies you a loan, it can be tempting to approach a predatory lender, aka a loan shark, to quickly access cash.

“A responsible lender won’t want to put you in a financial position that’s worse than the one you’re in,” Nkosi says.

Disreputable lenders, on the other hand, will offer loans without giving any consideration to your potential overindebtedness.

The loan approval process

“Before a lender considers approving your loan, they will conduct a credit check and an affordability assessment,” says Ndimande. “This will determine the amount of the loan, assuming that it’s granted.”

Your credit score is one of the key assessment criteria, as it indicates whether you’ve paid your bills responsibly.

“For a lender, your past behaviour reliably predicts how you’ll behave in the future. This will determine how much interest you’ll be charged, based on your risk profile,” says Nkosi.

He recommends borrowing from your bank, as your financial track record will be established to a greater or lesser extent, and you may get preferential rates. “This will influence pricing across a range of products, not just personal loans,” he says.

If you have multiple loans, your bank can help you to consolidate your debt into a single monthly repayment.

Should your loan be declined, Nkosi says, this will likely be for one of two reasons; “Either you can’t afford to service the debt, or you’ve repaid debt inconsistently in the past. In either case, your lender won’t have faith that you’ll be able to pay reliably.”

Tips when applying for a personal loan

When applying for a personal loan, there are three important guidelines to bear in mind.

• Understand the fees and interest charged so you can make an informed choice.
• Understand the terms and conditions of the loan. How much will you need to pay each month? What is the repayment term? What are fee amounts and frequency? What happens if you default?
• Don’t apply for a loan if you’re in financial trouble. Speak to lenders about restructuring any existing loans, or apply for a “payment holiday” on your accounts. Do, however, be aware of the financial consequences, such as being unable to access further credit during the restructuring period.

Tip: Savings can provide you with peace of mind in an emergency. You can compare investment options here.