Applying for a loan is so grown up, so serious and so daunting.
There are reasons for this because it involves legal documents, a lot of money and your faith that you’re doing the right thing. But how do you know if you’re doing it right?
What if every time you submit another application you’re just worsening your chances? What if you look desperate to other lenders when they see how many times you’ve applied at other lenders? Can they even see that I have been applying to other lenders?
Well, first off, that’s a lot of paranoia for one thought process, and secondly, you are right to entertain some form of concern since there will always be certain things in the financial world that count against you and some that count for you. When it comes to your credit score ratings, there are ways that it can be improved and there are ways that you might impact it negatively.
Understanding the lender
The truth is that lenders do have access to the record of how many occasions and places you have applied for a loan. This record also houses the info for any current loans you repay on, so hopefully, this counts in your favour. It’s not to say that they throw out your application or even red flag it, but they certainly would consider doing an official inquiry into the loans on your name to ensure that you are meeting those payments regularly.
If you can be trusted as a good payer, then you can be trusted with an additional loan. There’s even a name for this process and it’s referred to as “Footprinting”. It basically permits any lender the opportunity to come to an informed decision where your loan approval is concerned.
Short-term versus long-term
Friendships are for after hours, so remember that a loan is all business. Your aunt down the road might care that you need it desperately, but lenders, even though all they want it to approve credit for South Africans in need, they have to look out for themselves too. They will exercise a level of caution if you’ve walked in applying for a short-term loan, with a list as long as a rosary already on your name. If you seem risky, chances are that you could be.
Be mindful of how you portray yourself, both through the application process as well as behind the scenes with your other lines of credit.
With long-term loans, you need to understand the “behind the scenes” on their side in this instance. Since it’s fairly obvious that you would apply for a loan in more than one place, especially if it were for a home loan, they will be able to see all your other applications. A lender would have it in his best interest to secure the loan with you, therefore this little insight might actually land you up with a more competitive deal!
So, is that all it means? Won’t I have my credit score impacted? Your credit score certainly is a contributing factor in the decision on your loan, but all it does is give an indication of the current credit you have on your name, not any applied for credit as with submitting a ton of loan applications everywhere! It’s the score itself that you need to keep in check.
What then will impact my credit score?
So glad as you asked! The truth is, you probably already know the answer. Sounds tricky, but it’s not. If you have ever missed a payment, paid late or short paid on numerous occasions, you have very likely been impacting your credit score – negatively! Defaulting on an account is a real pain for the foreseeable future since it adds a nasty 5-year record at the credit bureau!
Each lender plays by their own rules, meaning that whatever the circumstance is with your accounts, they have the choice to action it how they please. Given that most firms have very little time to deal with such independent choices, the process is automated. The systems these days will simply tag your credit report and it’s there for everyone to see.
Another major factor is posing as an actual credit risk. The irony behind this little scenario is that you have never been a bad payer because you have never been a “payer” at all. Yip, that’s right, if you’ve never had any line of credit and could afford to buy most things cash in your life up until this home loan which understandably can’t be purchased cash, you are seen as a credit risk!
Banks want to know that you are able to repay on time and with the agreed amount regularly for a few months give or take. While you have been proving that you are a good payer, you have also been building up a clean credit report. As soon as you’ve done so and you have your home loan approved, you are welcome to close your clothing account or whatever it was that you used to get your credit score looking top notch! Your home loan will now be your go-to check for credit and how you handle your repayments.
A few final tips
Don’t apply for too much when taking out a short-term loan. Apply for a line of credit to help your credit score if you don’t’ have one and remember that a late payment is always better than no payment at all!