The keen anticipation of a financial boost by way of a credit facility to fund a transaction is what makes its rejection of sombre mood. In irreverent terms, it is nothing short of adding salt to injury in situations where the consumer’s circumstances critically needed the funds. It is not always in critical situations whereby people apply for credit, for some it is aimed at funding a new project for extra income.

Irresponsible Borrowing and Reckless Lending

Section 80 of the National Credit Act, 34 of 2005 discourages irresponsible borrowing by frowning on reckless lending. Reckless lending in simple terms is whereby credit is approved to consumers who by reasonable indications are already drowning or will soon drown in debt and therefore not manage their debt repayment obligations.

Since the formal credit industry is regulated, it has caused the informal lending industry to spiral out of control due to the absence of regulatory interventions, resulting in some conduct of the “loan sharks” bordering on criminality. In the most, consumers whose applications for credit were rejected by financial institutions, resort to the informal credit industry as a seemingly viable alternative. This trap has a huge number of prisoners in it, unfortunately.

Factors That Cause Loan Applications To Be Rejected

What are the factors that cause loan applications to be rejected by financial institutions thereby boosting the informal market? Is there anything that can be done to alleviate the situation?

Despite the President signing the National Credit Amendment Bill, promulgated to provide debt relief to consumers of debt who earn R7 500 per month or less and with unsecured debt up to R50 000, responsible spending and borrowing remains the number one cure to avoid over-indebtedness. Despite such interventions as the aforementioned Bill, a clean new slate will prove meaningless should the consumer sink back into irresponsible borrowing all over again.

In considering whether to grant a loan, financial institutions conduct assessments mainly aimed at inquiring if there is any assurance that the debtor will be able to honour their repayment obligations. This duty rests on financial institutions directly from the National Credit Act, so as to avoid any debt account to be declared as reckless lending to the detriment of the financial institution.

A consumer must present sufficient proof that they have a stable income from employment or a business venture to consistently honour their debt repayments. The income history must be regular and secure for a loan application to stand a better chance of approval. Income history is mostly proven by submission of bank statements as well as payslips for those who apply on the premise of their employment (3-6 months immediately prior). This is proof that the income is deposited into a valid bank account in compensation for their employment services.

Bond Affordability

The approval of a loan application will also hugely depend on the amount requested and the ability of the borrower to repay the loan instalments. This is generally known as affordability. It is believed and expected that a borrower will most likely pay for their essential living expenses first, before they pay for any debt instalments with the residue of their monthly income.

Therefore, the lender will definitely require an outlay of the monthly essential living expenses of the borrower so as to assess if there will be enough disposable income for the borrower to pay for the loan instalments. Where a consumer is left with R1000 after deducting monthly essential living expenses, a loan that will require monthly instalments of R3000 or more will most likely not be approved as it will amount to reckless lending.

Credit Profile & Credit Bureaus

The Credit Profile of the borrower is one of the most important and critical aspects the lender will look at in their assessment. This is available at Credit Bureaus who retain the credit history and credit behaviour of credit consumers in South Africa.

A credit profile will show:

1. Debt repayment history
2. The number of accounts that are open
3. The type of credit facilities open
4. The balances owing on open accounts
5. Credit score
6. Default history, judgments and Inquiries from credit providers

In the event that one is under Debt Review, credit cannot be granted by lenders. As one of its rehabilitative aspects, cutting on access to credit is a way to have the debt burden of the person under debt review cleared to restore their financial soundness.

Knowing beforehand the factors that lenders consider in loan applications will avoid setbacks if one is aware of their creditworthiness. The above factors are some of the most important factors that lenders look at in deciding whether to approve a loan application or not.  

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