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How Does a Loan Work? Application Procedure, Features and Approval

 There are times when we are a little thigh with our money and, we start considering taking a loan. If you’re in this situation, you must understand perfectly how everything works. That’s why, I want to explain to you how does a loan work. I’ll refer to the approval, application process and, special features of it.

    Loans work in a simple way. You borrow a certain amount of money to a lending entity to use it as you need and then, after an agreed period, you must pay it back. When you repay the loan, you’ll also pay some fees and interest the company charges for the service rendered. In general, companies charge: a fee applicants must pay only once, known as Initiation Fee; monthly fees known as, Service fee and, the Interest Rate. Usually, the initiation fee is the same for any loan you take, especially for smaller loans but, the service fee and, the interest rate are calculated according to the amount of money borrowed.

How long does it take to get approved for a loan?

    When you apply for the loan, you’re asked to submit some information about you and, your employment status. This is so because the bank needs to know if you can afford to repay the loan and, they need your monthly income, for example.

    Now, the waiting time to know if you’re approved depends on the company and, on the type of loan you’re applying for. Why’s this? Because, there are some entities, Wonga Loans for example, that offer short term loans and, as their quotes are usually low, their requirements are simpler and, it takes less time to verify the information. Some of these companies may even answer within an hour or the very same day.

    But, for home loans, for example with BetterBond Home Loans, the process takes longer. As this type of loan grants higher amounts of money for a longer period, requirements are more complicated. Applicants are regularly under credit checks, affordability checks and, their credit profile plays a much more important role. In this case, you must wait some days until you get the approval. You may even wait for few months, depending on the situation and, the documents you present.

What is a Guarantee for a loan?

    There are some cases in which you may be asked to present a guarantee when taking a loan. This is a special kind of loan, usually known as Pawn Loan. This loan works like this: when you apply for a loan, you present an item of value to the company for them to analyse the general condition of it, how it works, real value, etc. After that, the company states the amount of money you can take in exchange for that object. But, that doesn’t mean you lose it for good. You take the money and, when you repay the loan, you are given your item back.

    This alternative is a great idea if you need money but, you are unemployed or your salary is not high enough to qualify for a loan. If this is your situation, you can have this other option at mind. Of course, you must make sure you’ll be capable of cancelling the total cost of the loan or, the company will keep your valuable being able to sell it and, to take a portion of the value.

What are the five C's of Credit?

    As I told you earlier, companies usually go over some checks to assure themselves the possible borrower will cancel the loan requested. Here’s where the five C’s of credit appears. This is a well known system companies make use of to measure the creditworthiness of applicants. It refers to five features:

                                    + Character

                                    + Capacity

                                    + Capital

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                                    + Collateral

                                    + Condition

Let’s delve into each of them:

    1- Character:  this is also known as Credit History and, it refers to the reputation the applicant shows when referring to cancelling debts in the past, which can be seen in the credit reports of the borrower. This means, lenders will pay attention to your history of borrowing money and, more important, the ability you had to repay those loans on due time.

    2- Capacity: in this feature, lenders focus on your financial capacity when it comes to repaying the money. This is achieved by taking your income and debts into a comparison to verify you’ll have enough money to afford the loan. Besides, your DTI ratio (debt to income) is also put in assessment along with your job stability.

    3- Capital: when lenders look at this characteristic, they do so because the capital can be a sign of how serious the borrower takes the loan process, which helps companies feel comfortable to grant money. As an example, we can mention down payments. When applicants purchasing a home put a down payment, it gets easier for them getting a mortgage.

    4- Collateral: this is similar to “guarantee”, which I’ve already dealt with. What you must remember is that, the collateral is what functions as a security for the lender in case the borrower fails to cancel the loan. This is used for big purchases especially, like houses and cars.

    5- Conditions: in this case, it has to do with the purpose of the loan. It means, the lender pays special attention to the reason why the client is requesting the money because, they typically feel more comfortable borrowing money when they know the intention. For instance, buying a house, instead of taking a personal loan, for which you don’t usually need to clarify how you’ll use the money.

If you’re considering asking for a loan, these are few important points to have at mind:

* make sure you comply with the requirements the company requests.

* analyze all the types of loans to decide on the one that fits your finances.

* calculate your monthly payments and, make sure you can pay your regular expenses along with the loan payments.

    To conclude, taking a loan is sometimes seen as complicated and scary but, as you can see, all you need is to get well informed about it to make the right decision. Now you get these ideas clarified, you can go on with the application.

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Questions and Answers

What’s the longest term for Wonga?
This company has recently added a 6 months repayment term as the maximum alternative.
Is it possible to get a home loan online?
Yes! You’ll have to go over the entire process of completing the application and, sending the documents via email.
Can I find a physical Wonga branch?
No, they only work online.

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Rating: 3
Comment: I finally understand how everything works!
Rating: 5
Comment: Application is simpler for short term loans.
Rating: 4
Comment: BetterBond is one of the most reliable entities to get a loan.

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