How to get the best possible interest when buying a home in South Africa
Credit can be a valuable tool for financial growth and stability, and there are multiple ways to get a favourable interest rate from lenders.
Getting a credit facility or load at a good interest rate requires far more than simply filling out an application form.
According to FNB’s Ester Ochse, understanding how banks and other credit providers evaluate borrowers allows one to maximise one’s chance of getting a good response.
Credit score
Credit scores play a valuable role in the loan approval process. They provide a summary of one’s credit history and indicate whether one can repay a loan.
“Your credit score is calculated from your credit history, which includes previous loans, payment records, and overall financial behaviour,” Ochse said.
“The higher your credit score, the better your chances of being approved for credit at a favourable interest rate.”
Ochse also highlighted the financial pain many consumers face, with many turning to unsecured credit.
“FNB’s recent credit activity analysis reveals that most unsecured credit scorecards of customers who have taken out a lot of credit in the last six months could be a sign of financial distress or change in circumstances,” said Ochse.
“Moreover, on average, these customers tend to pay worse on the credit they’ve been given.”
Affordability
Credit providers are bound by the National Credit Act to lend money responsibly
Consumers thus have to make sure that they don’t get themselves in a situation where they can’t pay back their loans.
For instance, if one has only R1,000 left in their bank account after paying their monthly bills, a bank will not provide a loan with monthly repayments of R3,000.
Income and employment stability
Banks also scrutinise one’s employment status and the stability of one’s income.
This allows them to assess one’s ability to make the monthly repayments on the loan that they give you.
“If you can show that you have a stable job and/or that you have earned a steady income for a reasonable length of time, a credit provider will feel more at ease about the risk they will be taking on by lending you the money you want,” said Ochse.
Debt-to-income ratio
This compares how much one already earns, with the money that is left paying back existing debts.
A lower ratio shows a better balance between income and debt obligations and makes one more attractive for credit providers, as it shows one has a higher amount of disposable income, which can be used to pay back credit.
Banking history
If one is applying to a bank for a loan or another form of credit, their past relationship with their main bank can influence the outcome of their application.
“The bank will want to see that you have a solid history of responsible financial behaviours, such as making regular, on-time payments, not being overdrawn on your account often, and always having money in the account to cover your debit orders,” said Ochse.
Not a guarantee
Even if one has all these factors in place, there is no guarantee that one will get the loan they want.
“While it’s never a good feeling to have a credit application declined, it’s useful to take the experience as an opportunity to reflect on your finances and also take the necessary steps to improve your creditworthiness.”
Ochse said that one should contact the credit provider to explain why they refused the application, and one can try to address those areas.
“Remember that credit providers are not adversaries, and they’re not out to find reasons to turn you down, they just need to have the assurance that borrowers can and will repay their loans.”
“So, understanding exactly what positions you as such a trustworthy borrower in the eyes of credit providers, and then doing everything you can to meet those credit assessment criteria, is the best way of ensuring the success of your credit applications.”
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