How and why your personal loans get approved or rejected

Have you ever been in a tight financial spot that you eventually pluck up the courage and swallow your pride and visit your nearest bank for a cash loan?

Your eyes are filled with hope and expectation as the bank consultant types on her computer, but moments later she utters the harrowing words: "I'm sorry, your application has been rejected."

Used judiciously, personal loans can be a useful financial tool to pay things such as life’s unexpected emergencies, tertiary education, to start a side hustle or even consolidate your credit to make it easier to manage.

The application process should be quick and easy and unlike vehicle or home loans, where there’s an underlying asset, personal loans are unsecured.

Neven Narayanasamy from DirectAxis explained that loan providers take into account many things when considering a loan application.

“When you apply for a loan, it’s important to understand that there are legal safeguards in place that put the responsibility on the credit provider to ensure you can afford the loan. The laws are there to protect consumers.”

When you apply, the credit provider first checks your credit score. They get this from one of the credit bureaus. These are companies that compile and track information about consumers’ financial history including whether you pay your bills on time, how much debt you have and how your financial profile compares to that of other consumers.

“Most people don’t know or don’t bother to find out what their credit score is, so it can come as a surprise when a loan application is approved for a lesser amount or not at all. All South Africans are entitled to a free credit report for any of the credit bureaus. There are also plenty of free tools which allow you to check your credit score,” said Narayanasamy.

Among the documentation required such as proof of identity and proof of residence, credit providers will also ask for proof of income. Your latest payslip and bank statement or, if you’re self-employed, bank statements for the past three months.

This information is then used to calculate whether you can afford the loan for which you are applying.

Lerato Thwane, head of e-commerce at Tesserai, cautioned against making too many credit inquiries. "Each time you apply for new credit, a hard inquiry is made on your credit report. Too many inquiries in a short time can lower your score.

"Be selective about applying for new credit and only do so when necessary. Also, work with your creditors. When faced with financial challenges, contact your creditors to discuss your situation. Some creditors may be willing to work with you on a modified payment plan," said Thwane.

Narayanasamy said it’s essential to provide accurate information, not to conceal any debt or other financial obligations, and answer any questions honestly.

“It’s in nobody’s interest to lend you money you can’t afford to repay. While you may be disappointed if the loan or amount you asked for is not approved, it’s certainly better than subsequently finding you’re over-indebted.”

When applying for a loan, it’s important to understand:

• What the fees and interest rates are and how much you’ll have to pay each month,
• How long you have to pay it back – also known as the term of the loan,
• No matter how much you feel you need the money in the short term, it’s better not to have a loan approved than to be burdened with a debt you can’t repay.

• Avoid opening too many new accounts. Opening multiple new credit accounts within a short period of time can negatively impact your credit score. Only apply for credit when necessary and be cautious about opening too many new accounts.

Narayanasamy said if your loan application is not approved, there are things you can do to improve your credit score. The first of these is to pay your debts on time. Even paying a few days late can affect your score.

If, like most people, you have a number of different debt commitments, you can use the credit report to prioritise repayments. Try to pay off the debt with the highest interest rates first, while maintaining the minimum repayments on other accounts. Over time as you settle debt, it should reflect positively on your score.