You’ve applied for a loan, and you find that you qualify – but can you afford it? The distinction may not have occurred to you, but it’s important to consider it before putting pen to paper.
Qualifying for a loan vs being able to afford a loan
We explore the difference between qualifying for and being able to afford a loan, and some additional points to consider before making a commitment.
Tip: A healthy credit score allows you to negotiate a better interest rate. View yours via JustMoney.
1. Negotiate first
“Qualifying for a loan means that a lender is willing to make credit accessible to you based on their assessment of your finances,” says Ayanda Ndimande, strategic business development manager at Sanlam Retail Credit.
When you apply for a loan, lenders will examine your income and employment history, your debt-to-income ratio, the term of the loan, your liquid assets, such as savings, and most importantly, your credit score.
“Your credit score informs the lender of your financial habits. A healthy credit report allows you to negotiate a lower interest rate on your loan,” says Ndimande.
Any reduction to the interest rate on your loan will make a significant difference to the amount you have to pay back, which is why it’s important to maintain the health of your credit score.
You can do this by checking your credit report regularly, paying your debt on time, and limiting the amount of credit you use.
“A common mistake consumers make is failing to consider their credit options. By considering a variety of options, you may find lenders who offer better interest rates,” notes Ndimande.
This may mean you can accept a better offer, or return to the lender you originally approached with the newer offer, giving you the chance to renegotiate a better interest rate.
Consider loan affordability
After you have identified a loan with terms that suit, you need to think about whether you can afford it.
“Consumers must consider the impact that the loan repayment will have on their monthly expenses,” says Ndimande.
While you pay a part of the principal amount each month, the interest you pay will be based on the remainder of the principal, and this interest rate will be either fixed or variable.
A fixed interest rate is determined at the beginning of the loan term. A variable rate is based on the movement of the prime interest rate, which the lender uses to set their interest rates.
Because of this movement, the variable rate may benefit the borrower at times, and cost more than a fixed rate at others. This means that a fixed interest rate is less risky and easier to account for in your monthly expenses.
Ndimande notes that an affordable loan is one in which monthly repayments can be made without inhibiting your usual monthly expenses.
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