There are two main factors that lenders consider when deciding to approve your loan. The first factor is your credit score. Lenders first do a credit check on your id number to see how you have been managing your current credit. If your credit score is below 600 points, your application will be automatically declined. However, if your score is good , they will take time to see if they can approve you based on affordability. Affordability is the most important aspect of your finance application. It’s your ability to service the new debt based on your current financial position. Every single finance application can only be approved if the applicant has disposable income in their budget to repay the loan. This counts for employed people earning a salary and any business. Without affordability, the financier will not be able to approve your loan.
In this article we will discuss affordability information based on our application experience. Our goal is to help you to work on maintaining affordability within your budget, so your next loan application is approved.
Topics we will cover
- What is an affordability assessment?
- Bank statements don’t lie
- Affordability signs lenders look for
- How to work on affordability
What is an affordability assessment?
This is an assessment lenders undertake to see if the loan is sustainable for you over the period. They look at what income is left after paying expenses to work out disposable income. They also look at how much debt you currently have active to ensure that you maintain good debt levels. According to the national credit regulator, only one third of your salary can be spent monthly on credit. If you have exceeded this amount, you are considered overexposed. The same counts for business applications. The financiers are looking at how much profit is left over after paying all expenses. If the business has too much current debt it will affect the ability to repay the new loan.
The affordability assessment is conducted on your bank statements. Therefore, lenders always call for bank statements when you apply for credit.
Bank statements don’t lie
Over the years we have seen people not be truthful on finance applications. They give overinflated income or state their expenses are less. Some businesses also present their financial statements in a way that makes the business look more profitable than it is. The reality is this will not help any finance application because all assessments are conducted using bank statements.
Your bank statements tell the truth about your financial situation. Your bank account shows the transactions that occurred in real time.
It’s an accurate picture of how much you make and how you spend your money.
Therefore, it’s important to be prudent with your finances in your bank account if you want to be able to access credit at any time.
Affordability signs lenders look for
To grant your loan, lenders must be sure that you can repay your loan. They are also looking for good money management traits to ensure you are a good fit as a client. Your application needs to pass their internal risk policies to receive a pay-out.
From our experience, we have noted 3 factors lenders check on your bank statements:
1. Returned debit orders and payment disputes. Generally, when debit orders bounce or payments are rejected, it’s a sign you can’t cope with current expenses. If you are unable to pay current expenses you won’t be able to handle more debt. This is normally grounds for a decline but if you can provide a valid reason, it can be motivated.
2. Funds don’t last. Another factor that lenders check is how long the money lasts in your account. They are looking at your spending behaviour once funds come in. If you spend all your money within the first 5 days of getting paid, they will flag you as “funds don’t last”. If you are spending all your income quickly it’s a sign that you don’t have enough to make it through the month. For business applications if your bank balance drops below R5000 in a day, your application is declined. It’s always best to try keep as much money in your account as possible to show you are prudent with your spending.
3. Disposable income. This is extra money left after paying expenses. This tells financiers how much money you have in your current budget to afford the loan. If there is no income or profit left after paying expenses, there is no room to afford more debt. No disposable income is the main reason why applications get declined. People send us emails when they are rejected to let us know that if they had money, they wouldn’t need a loan. This is a misconception people have formed based on a lack of understanding of how finance works. They think that the best time to apply for credit is when you are down and out. But the reality is that it is probably too late. You need to have a surplus in your budget to repay the loan if you want to get approved.
How to work on affordability
To improve your affordability, you need to look at your budget. Disposable income is money left after covering all expenses. Thus, to increase your surplus you either need to increase income or reduce your expenses.
If you increase your income, you can keep your current expenses and improve your surplus cash. This would be the easiest option but it’s not always possible for everyone.
The other way to do it is to look at your expenses and see where you can cut costs.
Budgeting is the key to getting accurate information about how you spend your money. It may be worth the exercise to get comparative quotes on your expenses and see where you can save.
If you were rejected for a personal loan application, you can reapply again in 3 months’ time. Lenders will request your latest 3 months bank statements for a new assessment. Make sure your bank statements reflect the increased disposable income for 3 months to improve your approval chances.
With business loan applications you would need to wait 3-6 months, depending on the lender. It’s therefore best to reapply once your bank account shows improved disposable income for 6 months.
Affordability is the main deciding factor that gets your loan application approved. It can be improved by increasing your income or reducing expenses. The key is to keep more money in the bank so you can prove you can afford to repay a new loan.
At Premier Finance we provide application assistance for clients looking for a loan. Use our free service to connect with one of our financiers today.
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