In recent news we’ve been made aware that the availability of many different forms of credit have become increasingly scarce amidst the fallout of the pandemic. Mortgages are harder to negotiate and traditional business loans have disappeared as government backed Covid loans have been unrolled to try and prop up the economy as it shudders against the worst recession it has ever seen.
However one area I’ve seen much less discussed is the ‘short term’ spectrum of credit, which is where I want to start this examination. Short term loans saw an unprecedented change since the Coronavirus Covid 19 pandemic forced the world into lockdown. Overall demand plumutted and all manner of restrictions were put into place by lenders as safeguards. So what does that mean for people who need access to this type of loan now? Is there any hope of getting your hands on a loan at all, and who are the best providers? Here, we look at the key things to take into consideration.
A BBC report (click here for more info on the report) lenders told the Bank of England that demand for new mortgages, loans and credit card borrowing had dropped up until May 2020. Consumers had “played it safe” during this time, but the expectation was that there would be a sharp rise in demand in Summer. Now, supply has been squeezed on all of the people applying for loans. For example, the interest-free period on credit cards has been shortened.
So what does that realistically mean for people in need of borrowing during this time?
Well, lenders ARE still lending, but you may well notice stricter criteria for applying for a loan or delays in processing the loan. The famous short term loan supplier Wonga recently revised their entire lending criteria during Spring, reducing the total amount of credit available and the length for which one could access it. They also advise borrowers to think about why they are applying for the loan in the first place:
“We advise that our short term loans should only be used when you are faced with an unexpected expense you haven’t budgeted for … Just think of it as a cash advance before your money comes in.”
Source – https://www.wonga.co.za/
So, if you wanted to apply for the loan to fund a trip, to pay for a new TV or to buy luxury items, this is really not the type of loan you should be opting for.
Of course, it isn’t just these kinds of loans, but also mortgages that have been affected. The Global property Guide stated that housing demand in South Africa, and consequently house prices, are expected to fall this year. Furthermore, the SA economy is expected to shrink by 6.4% this year, mainly due to the effects of the COVID-19 pandemic on the nation. Read more on this here.
There was also The National Credit Act in South Africa, which aimed to protect borrowers from being in too much debt. This meant that lenders had to limit the amount of money that could be borrowed, and required every lender to assess the borrower’s credit-worthiness. It also required lenders to disclose all the information from the contract openly, so that borrowers can fully understand the loan they are applying for. The act has meant that there is a reduction in the supply of mortgage loans overall.
So, it does seem like you may have a harder time getting your hands on a loan or mortgage if you are already in considerable debt or a weakened financial situation. To maximise your chances of getting a loan, you should consider the following:
1) Checking your own credit report.
Does your credit report have any negative points showing, such as missed payments or overdraft charges? If so, you will want to address these, and attempt to tidy up your credit report, before you apply for any other form of finance. This is because lenders check your credit report and will use that to judge what kind of a borrower you are and how high risk you are. The higher risk you appear to be, e.g. it is likely you might miss a loan repayment, then the less likely they are to lend you the money.
2) Figuring out whether you really need the money.
We touched on this earlier, but consider the purpose of your loan. Do you really need that money? If it is for something you don’t really need, then you might reconsider.
3) Figuring out how much you really need.
It is tempting to often ask for more money than you need if you are applying for a short term loan, but the more you borrow, the more you have to repay. It is wise to use repayment calculators so you can get a sense of the amount of interest you will be paying. This can give you a good idea of really what you are repaying and how long it will take you. The longer you repay, the more interest you will pay over time, and so on.
4) Using a reputable lender.
It may be tempting to use a loan shark when you are in desperate need of money, but this really isn’t the answer. Loan sharks are not insured and do not have the good reputation that a reputable lender will have.
5) Taking your time deciding on which loan is right.
You can compare the loans that are on the market to get a good idea of the best one for you. Look at the rates and read the small print of the loan.
6) Speaking to an advisor if you are not sure.
It can be confusing when you read the small print of a contract and you really have no idea what you are signing! To get a better idea, you should speak to a financial advisor. Not only can they give you great advice but you can also have access to products on the market which you might have previously overlooked or just not found. They know the market inside out, so they can recommend what would be best for your unique situation. Remember that your financial situation is your own and no friend or family member, even with the best intentions at heart, can give you the same level of advice as a properly qualified financial advisor.
Have you had a personal experience with trying to obtain credit recently? I’d love to hear your thoughts and experiences in the comments below!