Big or small, every loan has an eligibility process that you will need to go through before getting approved. While this process may vary slightly depending on the lender and financial product you are interested in, you do not have to go into the process unprepared.
Knowing what your lender is looking for in a personal loan application can also help you negotiate terms to your advantage. For example, if you pose a higher credit risk, you may be subject to a higher interest rate. In this article, we’re going to discuss the personal loan process and what you can do to better your chances of being approved.
Let’s Breakdown the Personal Loan Eligibility Check Process
The overall personal loan application process looks something like this:
- Contact a lender
- Provide personal and financial information
- Affordability calculations and background checks
- Negotiations
- Approval
But what goes into those affordability and background checks, and how can you ensure that you are approved? Lenders use one of two methods to assess how much money you can afford to borrow, either the FOIR method or the NMI method.
The FOIR method, or Fixed Income to Obligation Ratio method compares your income to your current debts. In other words, you can think of this method as your income-to-debt ratio. If more than 50% of your fixed income is needed to pay off your current debts, you are unlikely to be approved for a personal loan.
The NMI method, or Net Monthly Income method compares your maximum loan amount to your current net monthly income. In simpler terms, this method calculates the total loan amount as a ratio of your salary. It is recommended that your maximum loan amount is less than 30 times your net monthly income.
Let’s consider an example of the NMI method: if your maximum loan amount is R100 000 and your net monthly income is R10 000, this ratio is 10:1. Your maximum loan amount is 10 times your net monthly income therefore, you are eligible for this loan amount.
The rest of your background check is made up of a number of factors including:
- Credit Scores
- Income
- Employment History
- Demographics
Credit Scores
A good credit score can make your personal loan application process go much quicker. A credit score is a number that provides an indication of your credit risk to potential lenders.
It takes into account your full credit history, including whether you have made repayments on time and in full, the type of credit lines you have held, the amount of debt you have, and any misdemeanours or defaults.
Credit scores range between 900 and 300, with 610 being an ideal score. Whilst any number below 610 is generally undesirable, a credit score below 499 is considered most undesirable and you are unlikely to be approved for a personal loan.
Income
Lenders will check if you receive a consistent form of income, and you will need to provide copies of your payslip and/or details of your employer. If you are self-employed or do not earn a steady income, you will face a stricter income check.
Your monthly income affects the amount of money you can borrow. This is to make sure that you can afford the repayments including interest. The higher your monthly income, the more money you can borrow. If you have not finalised the amount you need to borrow, you can ask your broker about the maximum amount you qualify to borrow.
Employment Status
Lenders requirements regarding employment vary, but you should be able to prove that you are employed. Showing job stability will greatly improve your chances of securing a loan with the terms and conditions that suit your situation. As a rule of thumb, you should have at least two years of work experience under your belt.
Demographics
Unfortunately, age does matter when it comes to taking out a personal loan. Lenders generally offer personal loans to people aged between 18 and 60. People over the age of 60 are usually out of the workforce. Therefore, there are very limited loan options.
How Can I Improve My Chances Of Getting A Personal Loan?
The first step to improving your chances of getting a personal loan is assessing your current financial situation. This includes obtaining a copy of your free credit report from a credit bureau, this should include your credit score and a record of any defaults in your credit history. Whilst assessing your financial situation, it is also helpful to assess how much you really need to borrow at this time.
Establishing a good credit score means practising good financial habits, such as opening lines of credit, paying off debts as soon as possible, and not defaulting on loans. Of course, this isn’t always possible if you are applying for a personal loan in an emergency, such as needing to pay off medical bills or pay for large renovations/repairs.
Beyond having a good credit score above 610, you should ensure that you have sufficient income and a good employment history. Upon assessing your current income and spending habits, consider contacting a financial advisor if you are having trouble managing your finances.
If you are interested in a specific personal loan, whether that’s because you want to stay with your existing lender/bank or you are attracted to that loan’s terms and conditions, it helps to find out about the requirements and process before approaching the lender. You can speak to friends and family members, online forums or websites like BetterLoans to find out more about the personal loans on the market.
What Documents Do I Need to Apply for A Personal Loan?
You should always submit recent documents to paint the most accurate depiction of your current financial situation unless otherwise asked by your broker. If you are self-employed or do not have a steady income, you may be asked for other financial documents, such as your business’s financial documents or older bank statements.
Here are the four documents you will likely need to submit for a personal loan application or affordability assessment:
- South African Identity Document
- Payslip/Proof of income
- Proof of residence
- Latest three months bank statements
Before contacting a lender, do your own research on the type of personal loans that suit your needs and affordability. Compare lenders, interest rates, and key information on the BetterLoans personal loans page. It doesn’t matter when or where, you can get quick and easy access to financial information at the tip of your fingers with BetterLoans!
