Applying for your first personal loan with a bank can be an intimidating task at hand. It always seems hard to know what you need. How much can you borrow? What is a credit score? All of these questions and more will be answered in this blog, so do not fret!
What You Need to Know
First things first, here are the basics of what you need to know before you apply for your first personal loan with a bank.
You need to ask yourself: how much money would you like to receive from the bank and how much of that are you able to pay back? Both seem like contradicting questions but this is a start. If the amount you need to borrow is more than what you are able to pay back, then you may need to start small and work your way up to a bigger amount.
In order to take out a personal loan, you need to assess where you are financially. This is in order to avoid debt. It’s not as scary as it sounds, and this can easily be avoided by calculating how much you should loan. To calculate the amount you are able to be loaned, all you need is:
- To review your entire income (all the money you receive in a month consistently)
- Go through all your expenses (even the little ones like an everyday petrol shop treat or coffee)
- And to lastly check the flow of your funds (i.e. how quickly are you spending your money?)
All of the above will help you figure out how much you are able to pay the loan back and how many months you need to be able to do so.
This gives you an overview of what the loan terms have the potential to look like. Then, you can make an agreement with your bank that best suits you from what you know. Once agreed upon, you’ll have a clear understanding of what to expect from your loan and set out a map of repayments that are manageable for you.
When you are negotiating with your bank, you should prioritise the total amount. This includes any fees and interest rates of the loan. Knowing this will guide you in which loan you should pick from your bank.
Check Your Credit Score
Do you have a credit score? Well it’s actually so easy to check what score you have. Your credit score is a prediction of how you financially behave. This is regarding how likely you are to pay a loan back and how quickly you are going to be able to do so. This information is based on your spending history or credit history. If you’ve never been given a loan before, you are considered higher risk as you wouldn’t have much of a credit score.
What is considered a “good” credit score? Well, this can vary based on your bill paying history, outstanding payments, and the amount of unpaid loan accounts you may have. A minimum good score is between 670-739 and an incredible score is 800-850. Anything below the 800-850 range and you will be considered higher risk. This means that a bank will offer you a lower loan amount with a slightly higher interest rate for their security.
This can actually be a good thing for your credit score. By taking out a smaller loan, and paying it back on time and in full, you can improve your credit score. In the long run, you’ll build a healthy credit score that allows you to get a bigger loan for a smaller fee.
Required Information
All you need for your personal loan application with a bank is:
- A recent payslip or a letter from your employer proving employment
- A valid SA ID number
- 3 months certified copies of your bank statements
- A proof of residence that is not older than 3 months
- A contact detail of your employer
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Factors Considered for Personal Loan Approval
Outstanding payments
This is based on how much money you still owe towards your credit card or a store account (e.g. from Edgars , Woolworths, or The Foschini Group) that you are yet to pay back in full.
This gives lenders an insight into:
- How you pay back your loans.
- Are you quick?
- Do you take your time?
- Do you take more than you can pay back?
These factors determine the rates your bank will be able to offer for the loan they set up for you.
Debt-to-income ratio
The debt-to-income (DTI) ratio compares how much money you are bringing in versus how much money you are spending each month to pay off debt. Specifically speaking, it is comparing the percentage of your monthly income that goes towards your rent, mortgage, credit cards or other debt. When you know your debt-to-income ratio, you can assess whether a loan is a good option for you. Your DTI can be calculated below:
Step 1
- Monthly rent or house payments
- Student, vehicle and other loan payments
- Credit card payments (use the minimum amount)
Step 2
Take the amount above and divide that by your total monthly income (this is the amount before tax)
Step 3
The result is your debt-to-income ratio, in the form of a percentage. The lower the DTI, the less risky you are to lenders.
Your income
What you earn on a monthly basis needs to be more than your overall expenses. The amount you will eventually pay back monthly for your loan with the bank is also considered. This is because your bank wants to see that you can afford, and pay back, the loan.
Payment history
This is primarily what your bank will look at when deciding if they are able to give you a loan. Banks want to see how you pay back loans and if you have paid back all your loans in full. This will show them that you can stay on track with payments and are a low risk to lend to.
Requirements set out by the National Credit Act
The National Credit Act guarantees every consumer the right to credit. Since credit and debt can have a negative impact, the NCA ensures that the credit process is not taken lightly, by credit providers and borrowers. The maximum interest rate of a loan is 24,5%. The good thing is with a good credit score of 670 and above, you can get a better interest rate. Learn more about the NCA here.
Conclusion
Use this blog as a guide to prepare you for your loan application with your bank. You can now go into your bank, prepared for a personal loan application, with full knowledge and a plan on how to get the best rate for the best price. From knowing your debt-to-income ratio and payment history to understanding the influence your credit score has, you’ll be better prepared for your next bank loan application.
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