Securing a Personal Loan with a Low Credit Score

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Getting a personal loan application approved in South Africa does involve a number of factors, including your income, employment history and age. But your credit score is the most important factor of them all. 

A credit score is a three-digit number that tells potential lenders all about your credit history and how much of a credit risk you pose as a borrower. A low credit score can make it very difficult for you to secure a personal loan, but it’s not always impossible. Let’s discuss a few ways you can improve your loan approval chances.

Assess the Need for a Loan – Especially with a Bad Credit Score

As always, before taking a major financial decision, you should sit down and assess your financial situation and needs. Ask yourself a few key questions:

  • Why do I need a personal loan?
  • Is there a way for me to get through this without borrowing money?
  • How much do I absolutely minimum loan amount need to borrow?

Depending on the situation, it may be worth dipping into your existing savings instead of taking a loan. Contacting a licensed financial professional, such as a debt counsellor or financial advisor, is a great way to ensure that you make the best possible decision for your financial future.

Five Ways to Improve Your Personal Loan Application

If a loan is the way forward for you, there are a few ways you can improve your chances of qualifying for a loan. Obtaining a copy of your credit report from a credit bureau, such as Experian, TransUnion and XDS, is a great starting point for deciding how you can improve your credit score.

A key aspect of improving your credit score is finding ways to display your trustworthiness and financial responsibility to lenders. Other than this, you should review your credit report to ensure that all the information is accurate. This includes your personal information and information regarding your outstanding debts, be especially vigilant for signs of fraud or mismatched accounts.

So, the five ways to improve a low credit score are:

  • Pay your creditors on time
  • Use credit cards and pay back on time
  • Lower your credit utilization rate
  • Check your credit report for mistakes regularly 

Setting up a debit order to pay your creditors is an excellent way to stay on top of your outstanding debts. This is more applicable to debts that require you to pay a set amount of money each money, such as loans, phone contracts, or insurance payments. 

Use your existing lines of credit to prove your creditworthiness to future lenders. For example, you could use your credit card to pay for expenses that you have already budgeted for that month. This could mean buying your groceries for the month with your credit card. At the end of the month, ensure that your credit card bill is settled to ensure your credit score gets a boost. 

Your credit utilization rate is another indication of how responsible you are as a borrower. The percentage is calculated by considering the amount of credit being used divided by the total credit allocated to you. For example, if your credit card has a credit limit of R10 000 and you have an outstanding debt of R5 000, your utilization rate is 50%. Ideally, your credit utilization rate should be between 30%-50%.

Lastly, you should be regularly checking your credit report through different credit bureaus to ensure that your details and financial history are accurately captured. Key details to check when reviewing your credit report includes your name, identity number, address, account numbers, and defaults.

Avoid A Low Credit Score Moving Forward

Securing your personal loan is just the beginning. Once you’ve taken on a personal loan, it becomes even more important to ensure that you are making responsible financial decisions to protect your credit score. 

Once again, it helps to begin by assessing why you have/had a low credit score. The main reasons behind low credit scores are:

  • Defaults on previous loans/credit lines
  • History of Bankruptcy
  • Frequent changes of address/personal information
  • History of repeatedly skipping repayments/late payments
  • Making numerous credit applications within a short time frame
  • Mistakes on your credit report

Defaults and missed payments may be the result of poor time management, poor organisation, or lack of proper budgeting. Luckily, there are relatively easy ways to remedy this.

Whether you’re a fan of paper journals or digital calendars, you should make a note of your loan repayment amounts and due dates. Always plan so you can make your loan repayments before the due date.

Once you know how much you need to pay and when you should work your loan repayments into your monthly budget. Assess your expenditure and consider cutting out luxuries from your budget to make sure you have enough money for your loan repayments.

If you have defaults or a history of bankruptcy, it is advisable to seek professional financial help. Your unique financial situation and habits should be assessed individually.

Keeping track of your credit score and debts is a great habit to cultivate, especially when it comes to ensuring that there are no mistakes on your credit report. Try to limit the amount of debt you have, by making regular repayments towards your existing debt and not incurring any extra debt unnecessarily.

BetterLoans is here to help everyday South Africans make smarter financial decisions. If you’re looking for a personal loan, you can learn all about lenders, interest rates, and other key information on the BetterLoans personal loans page.

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*Representative example: Estimated repayments of a loan of R30 000 over 36 months at a maximum interest rate, including fees of 27.5% APR would be R1 232.82 per month. BetterLoans is an online loan broker and not a lender. Our service is free, and we work with NCR-licensed lenders in South Africa. Interest rates charged by lenders can start as low as 20% APR, including an initiation and service fee determined by the lender. The interest rate offered depends on the applicant’s credit score and other factors at the lender’s discretion. Loan amount R500 – R350 000. Repayment terms can range from 3 – 72 months. The minimum APR is 5%, and the maximum APR is 60%.

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