Most people need financial help at some time, but borrowing money isn’t something South Africans like to think about or discuss, so they may not know as much about it as they could.
It may be an unforeseen medical expense or a car breakdown. Or perhaps, because interest rates are so low, it could be a good time to build that home office. Whether it’s an unexpected event or a planned project, sooner or later most of us will face an expense that we can’t cover from our cashflow or savings.
When this happens personal or unsecured loans are often a consideration because the application process is relatively easy compared to some alternatives. And, because the loan is unsecured, in order to qualify you don’t need to offer security such as a house, car or other asset.
Shafeeqah Isaacs, head of financial education at personal loan specialists, DirectAxis, explains that this doesn’t mean credit providers simply approve every application.
“There are two reasons – the law and good business. The National Credit Act requires that lenders make sure you can afford the loan. Over-and-above this, sensible credit providers also apply their own careful checks to ensure the money they’re lending will be repaid and that they don’t put customers in a difficult position when they’re unable to make payments.”
The law requires credit providers to carry out a series of checks before approving a loan. These include confirming your credit score, income and how much debt and other expenses you have. Your expenses, including debt repayments, are then compared to your income to see if you can afford the loan.
Lenders get your credit score from one of the credit bureaus, such as Experian, TransUnion, CompuScan or XDS. The score is based on your credit and repayment record and shows how financially dependable you are. There are a number of factors that influence your score, but most importantly, if you pay all your debts on time, you’ll have a high score. If you don’t and have outstanding or unpaid debts, it will be low.
By law you are entitled to a free credit report from any of the bureaus each year, but most people either don’t know this or don’t bother to ask for it and as a result don’t know their score.
Fortunately, there are now plenty of free online tools such as DirectAxis’ Pulse www.directaxis.co.za/pulse which, once you’ve completed a simple registration, allow you to check your credit rating as often as you like.
“Although these online tools are now widely available comparatively few people use them and are then surprised when their loan applications are not approved,” explains Shafeeqah. “This leads to all sorts of conspiracy theories such as ‘blacklisting’.”
There is no such thing as ‘blacklisting’ or any list of people who are permanently denied access to financial services. If a loan or any other application for credit is not approved, it is usually because you have a low credit score. That’s why credit providers can’t or won’t lend you money. Either they can’t because the National Credit Act prevents them doing so or won’t because they regard you as too much of a risk.
“The real problem with the nonsense about ‘blacklisting’ is that it is misleading, and people assume they’re on some fictitious list which they can’t get off. In fact, if you have a low credit score you can improve it over time, by reducing debt, paying what you owe on time and re-building your credit profile as someone who is financially dependable,” says Shafeeqah.
There are other benefits to regularly checking and maintaining a good credit score. One of these is that you’re likely to receive better interest rates because you’re considered less of a risk.
Platforms like Pulse will also show you what loans and other financial products you could access with your credit rating. If you are eligible for a personal loan and want to apply, the other documentation you will need is:
- Proof of identity in the form of a clear copy of your South African identity document.
- Proof of residence such as a recent utility or rates invoice or similar document confirming your residential address. The document should be less than two months’ old. If you are renting or have a PO Box rather than a street address you will need to provide some other form of confirmation, such as an affidavit from your landlord.
- Proof of income, such as recent payslips or bank statements for the past three months.
These are the basic requirements. In some cases, applicants may be asked for additional information. For example, people married in community of property may need their spouse’s permission.
The law requires credit providers to check your credit score and collect other information about you, but you have a responsibility to provide information that is accurate and to answer any questions about your expenses and other debt honestly.
“A personal loan can be a useful way to deal with an unexpected and essential expense or improve your situation, but it is a commitment and something you should consider carefully. You must understand that although there are legal and other checks in place to protect you, ultimately it is your responsibility not to borrow more than you can afford to repay,” says Shafeeqah.
For more visit: www.directaxis.co.za
