8 Things to Consider Before Applying for a LoanPublished: 14/07-2021 Category: Articles
Before applying for a loan, you need to consider a few things and what can prevent you from getting approved for a loan.
What type of loan do you need
There are various types of loans available in South Africa, and before making a decision, you need to determine what you need the funds for. Examples of loans available include:
- Student loan
- Home loan
- Business loan
What is an acceptable interest rate for you
One of the most important things to consider before applying for a loan is the interest rate. A low interest rate is good, but the term of the loan might be longer. Ensure the interest rate is reasonable when compared to the loan’s term.
What are your options with my credit score
Before you get approved for a loan, lenders will check your credit history. You can qualify for a higher loan amount if your credit score is higher. It’s vital to improve your credit score if it’s too low by paying your accounts on time and clearing minor debts.
What Loan Term are you looking for
The loan term is the period it takes to repay the loan. Depending on the type of loan you are considering, your repayment period can vary between months and years - even up to 30 years.
Some lenders will reduce the loan term if they think you can afford to pay the loan off quicker. As a general rule of thumb, the best option is always to pay your debt quickly. However, this can increase your monthly repayments. Remember that along with interest rates, the loan term determines the total cost of the loan. If the loan term is longer, you will have a lower monthly instalment.
Your Financial Situation
Before considering taking a loan, you need to see what your affordability is. This can get done by evaluating your current financial position. Calculate your monthly budget to determine how much you can afford in monthly payments, and from there, you will know how much you can afford to borrow. You need to apply for a loan that you can comfortably repay.
Look out for Fees and Hidden Costs
A lender may have hidden charges that are disguised as processing fees or administration fees, etc. There will also be penalty costs if you miss a payment or make late payments. Ensure you read through the terms and conditions of the contract to understand all the hidden costs involved.
Your Debt-to-Income Ratio
If you have any debt, your debt-to-income ratio is an essential factor to consider. It's the ratio of your monthly debt commitments to your monthly income. The smaller the ratio, the greater your chances of getting a loan approved.
Do you need Collateral or a Co-Signer
If you're struggling to get a personal loan that is unsecured approved, you can put down collateral to demonstrate to the lender that you're serious and that you're willing to pay back the money or risk losing the valuable item. If you're still young and just getting started or have a high debt-to-income ratio, you can also ask a family member or friend with a decent credit history or a larger income to co-sign the loan application.