What banks consider when you apply for a personal loan
Among the criteria that a South African bank uses when assessing a personal loan application are:
- your credit history
- your current monthly income
- whether you own property (and where)
- factors associated with their “consumer risk profiles”, like your age
- whether you have an account with the bank and if so, the history of your transactions.
In terms of paperwork, you’ll typically need to provide at least three months worth of bank statements showing your monthly income, as well as a copy of your ID and proof of residence.
Once you’ve completed the required paperwork, a committee will review your application before rejecting or granting it. This can all take time.
Bank loans: when things get complicated
You have a poor (or no) credit history
Your chances of getting a personal bank loan are obviously lower if you have a spotty credit history. Paradoxically though, a perfect credit history can be as much of a disadvantage. If a bank can’t access information about your behaviour in terms of repaying debt, it’s unlikely that your loan application will be approved – even if the reason the information isn’t available is that you simply haven’t had much debt.
Your monthly income fluctuates
Things also start to get complicated if you’re self-employed or your income is in the form of commission. The truth is that banks don’t like either of these circumstances when it comes to granting personal loans because they mean that you deviate from the “normal” model they use as part of the loan approval process.
This is becoming increasingly short-sighted as more and more people move out of traditional “nine to five” office roles, working from home or on a flexible basis as contractors, entrepreneurs or freelance workers.
If you’re self-employed, you’ll need to supply a signed personal statement of assets and liabilities. You’ll also be asked for a balance sheet and financial statement for the business from which you get your income.
If your income is based on commission, you’ll need to supply statements showing your commission earnings over the last six months.
You don’t have an account with the relevant bank
A final complication is trying to get a loan from any bank where you don’t have an account. Generally banks prefer to grant loans to individuals who already have accounts with them.
How asset-based loans differ from bank loans
The lender doesn’t need your credit history
In the case of asset-based loans, the lender doesn’t need to consider your credit history, age, status or any other information about you. That’s because you provide an asset as security for the loan.
This is much more straightforward than relying on “clues” about whether an individual will or won’t repay a debt, like banks do.
It can also be fairer. For example, banks don’t allow for mitigating circumstances that may explain why you have a poor credit history. Their loan approval processes may also discriminate unfairly against you if your monthly income fluctuates.
With an asset-based loan, the loan amount you’re offered depends purely on the assessed value of the asset you provide as security.
The loan is immediate
Because an asset-based loan is backed by an asset, there’s no need for time-consuming reviews of your information. This means a loan can be granted almost immediately – often you’ll get the funds on the same day you apply.
The asset is returned once the loan is repaid
Like a traditional bank loan, an asset-based loan is repayable with interest. Once you’ve repaid the loan plus interest at the agreed rate, the asset you supplied as collateral for the loan is returned to you in its original condition.
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