People applying for loans today tell stories that those who applied ten years ago find unfathomable. There is a lot more to a loan application today than there was back then. The number of financial hoops applicants need to jump through before being approved has become seemingly insurmountable.

So, why is it getting harder to get loan approval in South Africa?

Applications for unsecured loans have reached record highs. These loans are not backed by collateral such as fixed assets but rather by the borrower’s prospects as a creditworthy risk.

It means that the bank investigates the financial history of the applicant to assess the probability of getting its money back. If the credit score indicates the applicant has a history of defaulting on loans, the bank is likely to decline the application.

The chances of getting its money back are poor, given that past financial actions are regarded as a sound predictor of future fiscal behaviour.

Financial institutions are responsible for making reasonably sure that they’re going to get their money back before approving a loan. Part of this responsibility is making sure that the loan repayments are within the means of the borrower.

Otherwise, loan repayments become crippling, and the borrower is likely to default.

Unpaid loans have negative consequences for banks and borrowers alike. Financial institutions turn a profit on the interest they charge on loans. When loans are not paid, the banks lose money.

Borrowers who do not pay their financial debts experience a lowering of their credit score, which affects their ability to sure loans in the future.

For the protection of financial institutions and individuals alike, the Credit Bureau insists that banks do their due diligence before offering loans. Financial institutions base their loan criteria on legal regulations as well as an overview of repayment behaviour.

South African banks have, in the past, been guilty of offering loans to clients who would never realistically be able to pay them back. There are lots of applicants who are not well-informed of the consequences of failing to repay loans.

As a result, they have been blacklisted when they failed to repay loans. This has led to a tightening up of loan application processes.

Getting an unsecured loan

• A good credit score is necessary. Maintain your credit score by paying your accounts, credit cards and other loans.
• Fixed assets are a definite advantage that can increase your chances of approval by up to four times.
• Being able to show that you’ve bought a home or a car and paid for it shows the bank you stick to your financial commitments. As strange as it sounds, you need debt to secure debt.
• Your loan amount can be anything from R2,000-R200,000. However, banks have the right to approve a loan for less than you have applied for. Borrowers with fixed assets are more likely to get the amount they request than those who don’t.
• The repayment period varies from 6-84 months and depends on the size of the loan.

The downside

Many less fortunate South Africans do not meet the criteria for an unsecured loan from a bank. They turn to informal mashonisa (money lenders) to get the money they need.

A small, informal mashonisa does not need to register with the Credit Bureau, although they do have to comply with its regulations. Less than scrupulous operators ignore the regulations.

Their victims are financially vulnerable citizens who are easily taken advantage of. These mashonisa charge exorbitant interest rates and resort to tactics like ID confiscation and violence to get their money back.