Although most of us need financial help at some time, borrowing money is not something we like to talk about, so we probably don’t know as much about it as we think or should.
It could be an unexpected medical expense, a deposit to secure a place at a school or university, a car repair, home renovation or overseas holiday. Planned or unexpected, sooner or later most people will face an expense that they can’t cover from their cashflow or savings.
“When this happens, personal loans are often a consideration,” explains Marlies Kappers, chief marketing officer at DirectAxis.
She says home renovations and education are among the top reasons people apply to the financial services provider for personal loans.
The first thing prospective loan applicants need to understand is that credit providers can’t approve every application they receive. The National Credit Act regulates lending in South Africa. This law puts most of the responsibility on the provider to check that the applicant can afford to repay the loan.
Credit providers must follow a series of steps before approving the loan. These include confirming the applicant’s credit score, income, amount of existing debt compared to income and other expenses.
There are four credit bureaus – Experian, TransUnion, CompuScan and XDS – which provide credit scores. Although South Africans are entitled to one free credit report a year from one of these providers, most don’t apply for this and as a result don’t know their score.
“This means people are surprised when an application for credit or a personal loan is turned down. Unfortunately, this can lead to some jumping to the conclusion that they’ve been ‘blacklisted’,” says Marlies.
There’s no such thing as ‘blacklisting’, she explains. If your loan application is not approved it could mean that you have a poor credit score and based on that, credit providers are unable or unwilling to lend you money.
“The problem is that the term “blacklisting” is misleading and many people assume there’s nothing they can do about a poor credit score. That’s not true. You can gradually improve it by reducing debt, paying what you owe on time and building your profile as someone who is financially responsible.”
To help people understand their credit scores and take control of their finances, DirectAxis has launched a free online tool called Pulse. Once registered on Direct Axis, users can check their credit ratings as often as they like. It also provides information about what they can do to improve their ratings and tracks progress over time.
There are benefits, other than gaining access to credit and other financial products, to improve your credit score. One of these is that you’re likely to receive better interest rates because you’re considered less of a risk.
Assuming you have a suitable credit score other documentation you will need when applying for a personal loan includes:
- 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 shouldn’t be more than two months’ old. If you are renting and 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. This is straightforward as you can provide copies of recent payslips or bank statements for the past three months.
This is the minimum needed. In some cases, applicants may be asked for additional information. For example, people married in community of property might need a spouse’s permission.
“The law requires credit providers to check your credit score and collect other information, so you don’t borrow more than you can afford. In order for lenders to be able to do this, you also have a responsibility to ensure that what you provide is accurate and that you answer any questions about your expenses and other debt honestly,” says Marlies.