If you haven’t applied for credit before, you may find the process confusing. There are several steps to follow before you can secure a loan – and some may require a degree of effort.
You should also bear in mind that loan agreements are legal contracts, so you’ll need to make sure you understand some complex terms and conditions.
We explain how to apply for credit, and what your legal commitments are once you’re granted a loan.
How to take out credit: A step-by-step process
Before you apply for a loan, you should familiarise yourself with the credit application process.
The first step is to check your credit score. This important metric plays a major role in determining whether you’ll qualify for a loan. It’s essentially a number that indicates how trustworthy you are as a borrower.
Lenders access your credit score through various credit bureaus. These bureaus have their own range of scores; for example, a TransUnion credit score ranges from 0 to 999 while an Experian score will be between 1 and 657. The higher the score, the better your chance of securing a loan.
If your credit score is low, a lender will likely reject your application. If it’s average, some lenders may agree to a loan but on stricter terms; for example, they may charge you higher interest.
Once you’ve viewed your credit score, and determined the likelihood that you’ll qualify for a loan, the next step is to work out how much you need to borrow. This will depend on why you’re taking out the loan, which in turn will help you decide between various loan options. We outline the main loan types below.
Types of credit available
Personal loans
Personal loans are unsecured loans, meaning, they’re not tied to an asset, such as a car or home. They’re useful if you need extra money in an emergency, if you want to further your studies or career, or if you aim to consolidate your debt.
They can also help you acquire assets if you don’t have ready cash, although it’s better to opt for a different type of financing for these, as personal loans attract high interest.
Home loans
Home loans are secured loans, meaning, you need to provide collateral. This means using an asset as security for the loan, which protects the lender if you can’t make your repayments.
In the case of a home loan, the property itself serves as collateral, which means the lender has a legal claim on it until the full loan amount (including interest) is repaid.
Home loans have longer repayment terms than other loans – up to 30 years – and lower interest rates.
Credit cards
A credit card is a revolving credit facility that allows you to borrow funds from a bank, up to a pre-approved limit. As you make repayments, these amounts become available for you to borrow again.
Credit cards help you finance large purchases and come with interest-free periods of up to 55 days. However, because these loans are not secured by some kind of asset or collateral, interest charges are high.
Vehicle finance
Vehicle finance loans are offered specifically for vehicle purchases. They are secured loans, as the vehicle itself serves as collateral. For this reason, interest rates are lower than with unsecured loans.
Store accounts
While not technically “loans”, store or retail accounts are a type of revolving credit facility offered by major retail stores, allowing you to make purchases using credit. Approval is given for a set credit limit, based on your creditworthiness and ability to make repayments.
High interest rates apply to these accounts, so it’s best to use them sparingly.
The credit application process
Here’s how to equip yourself before applying for credit.
Assess your credit needs
Ask yourself if you really need a loan, or if you could save up to achieve your goal. Taking out a loan is a financial and legal responsibility.
If you want to fund your studies, renovate your home, consolidate your debt, or pay unexpected medical bills, a loan may be a suitable option. However, it’s unwise to take out a loan to pay for a holiday or a new television set, or to gamble.
Once you know what you need the loan for, be clear about how much you need and how long it will take you to repay it. The smaller the loan, the easier it will be for you to pay it off.
Decide on the right lender to approach
In South Africa, you can borrow from:
- Major commercial banks
- Credit unions
- Specialised lenders, such as vehicle loan providers
- Microfinance institutions that provide small unsecured loans
- Furniture retailers that offer financing for furniture and appliances
- Private lenders
The most important factor is whether your chosen lender is registered with the National Credit Regulator (NCR). You can find a list of registered credit providers on the NCR website.
Banks and credit unions are regulated by the South African Reserve Bank and must have the necessary operating licences to provide financial services.
Steps to apply for credit
Once you’ve determined the type of loan that will work for you, and selected a lender, you’ll need to prepare a set of required documents.
Gather the necessary documentation
Here’s a list of the supporting documents needed when submitting a loan application:
Identification documents
Your identity can be verified using your green South African identity book, your smart ID card, or a valid passport.
Proof of income
You will need to provide payslips and at least three months’ worth of bank statements. This proves you have a regular, stable income and can afford to repay the loan.
Proof of residence
Proof of residence of not more than three months old helps to confirm both your identity and stability.
Utility bills, a lease or rental agreement, bank statements, a cell phone or internet account, motor vehicle licence documents, and a title deed or home loan statement can all be used as proof of residence.
Financial statements
If you’re self-employed, lenders usually ask for payslips (generally from the last three to six months), bank statements (from the last three to six months), income tax returns, and/or annual financial statements.
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Find out moreThey may also request a list of assets and liabilities, proof of your regular monthly expenses, and additional documents, if you want to buy a car or home.
Completing the application
You can typically apply for a loan online, via an app, or in person. However, even if the process seems informal, you will still need documents for verification purposes. This is a requirement of the National Credit Act (NCA).
The documents help a lender assess your gross income and current financial responsibilities. This is known as an affordability assessment.
The credit approval process
How do lenders decide to approve or decline your loan application? Here’s what you need to bear in mind.
The lender’s credit assessment
By law, a lender must assess whether you can afford to repay the loan, and are likely to do so. For this reason, they examine several specifics very carefully.
These include:
- Your credit score. This is a dynamic number that changes with your financial behaviour and represents how trustworthy a borrower you are.
- Your credit history. This is a record of any loans you’ve been granted, indicating amounts and credit limits, and your payment history. Your payment history tells a lender if you’ve made any late or incomplete payments, or skipped some altogether, which would make you a poor loan candidate.
- Your income and expenditure. These factors determine whether you can afford a loan and if you’re responsible with your finances. Do you live within your means, or do you come up short at the end of every month?
- Your debt-to-income (DTI) ratio. Lenders use your DTI to work out whether you’ll be able to manage your debt payments given your gross monthly income.
The formula to work out your DTI is to divide your total monthly debt repayments by your gross monthly income, and multiply this by 100.
If your total monthly debt payments amount to R7,500 and your gross monthly income is R20,000, your DTI ratio will be (R7,500 ÷ R20,000) x 100 = 37.5%. A DTI ratio below 36% is usually considered healthy, but lenders’ opinions may differ.
Decision-making and notification
Once a lender has conducted a credit and affordability assessment, they will decide whether to approve or decline your loan request.
Many of these processes are automated, and straightforward for small loans – the more so if you have a good credit score. More complex cases may be referred to a credit analyst for review.
After approval: What’s next?
If your loan is approved, you’ll receive an offer that sets out the loan amount, interest rate, fees, repayment terms, penalties for late payments, and other conditions.
You’ll need to review the offer carefully, and make sure you understand all the terms and conditions.
Understanding your repayment terms
The NCR stipulates the maximum interest rates lenders may charge, so review the interest rate you’re offered, and make sure you understand how interest is calculated; for example, is the rate fixed or variable?
Check the repayment schedule to determine how often you need to make payments and how long it will take you to pay off the loan. Will your financial situation and cash flow allow you to comfortably repay it?
Make sure you understand how any penalties may work. What will you be charged if you miss a payment, or you want to repay the loan early?
Find out if your lender wants you to take out credit life insurance or any other type of cover to protect themselves in case you can’t pay, and if so, what this will cost.
Finally, learn about your rights and responsibilities as a borrower. The NCA protects you as a consumer; including your right to receive a credit agreement that is fair and easy to understand. If you have any concerns, contact a consumer rights body to help you determine whether the terms are fair and comply with South African law.
Signing the credit agreement
If you’re satisfied with the loan offer, you must formally accept it – either online, or by signing an acceptance form. The lender will then prepare a formal credit agreement for you to sign, which includes the terms and conditions set out in the offer.
Signing the credit agreement is a crucial step in the process, but you should only sign if you understand your obligations and you’re willing to accept the terms and conditions. Always read the fine print to make sure there are no “hidden” clauses or terms that could affect your financial responsibilities.
Once the agreement is signed and all verifications are complete, the lender will deposit the funds into your bank account.
Managing your credit
Receiving funds can bring relief or excitement, depending on your circumstances, but it’s vital that you manage your loan amount with care.
Make sure you can meet your monthly repayments without straining your finances, in order to maintain financial stability and avoid the debt trap.
Make timely payments
How you manage your loan repayments can affect your credit score, so always pay in full and on or before the due date. This will make it easier for you to access further credit in future.
Late or missed payments will limit your borrowing options, harm your credit score, and increase the cost of future loans, so either automate payments or diarise when you need to pay.
You may also have to pay penalties for late payments, which can make the loan more expensive.
It’s important to understand that a credit agreement is a legal document, and if you default on your loan your lender is within their rights to take legal action against you. To avoid this, manage your loan properly by budgeting and/or drawing up a financial plan.
If you can’t exercise discipline, be cautious about taking out a loan. In this case, it may complicate your financial situation rather than solve your problems.
Good credit management, on the other hand, will build trust with your current lender and potentially lead to better loan terms and more flexibility in future financial dealings.
Monitoring your credit score
Monitoring your credit score regularly is the best way to maintain or improve it.
Your financial behaviour has a direct impact on your credit score, so pay your bills on time, pay off your debts, and contact your lenders immediately if you think you won’t be able to make a payment.
If you have more than one loan and struggle to make repayments, consider debt consolidation.
