Top 5 Loan Requirements Banks Look For Before Approval

Applying for a loan can be a significant step toward achieving financial goals such as buying a home, funding a business, or covering unexpected expenses. However, banks follow strict procedures before granting credit to ensure the borrower is capable of repayment. Understanding the 5 loan requirements of a bank can improve your chances of getting approved and help you prepare a stronger application.

This article outlines the essential factors that South African banks consider when evaluating loan applications for personal, home, or business loans.

1. Proof of Income and Employment

One of the most important loan requirements banks assess is the applicant’s proof of income. This helps lenders determine whether the borrower earns enough money to meet the monthly repayment obligation.

a. For Salaried Individuals:

Applicants must provide:

• Latest 3 to 6 months’ payslips
  
• Bank statements showing salary deposits
  
• Letter of employment (in some cases)
  

Banks use this information to calculate disposable income, which is crucial for determining affordability.

b. For Self-Employed Individuals:

Requirements include:

• Personal and business bank statements (usually 6 to 12 months)
  
• Audited financial statements
  
• Proof of business registration or tax clearance certificates
  

Since self-employed income can fluctuate, banks often take a conservative approach when reviewing irregular earnings.

Why This Requirement Matters:

Reliable income is a primary indicator of loan repayment ability. If income is inconsistent or insufficient, the loan application may be declined or approved for a lower amount.

2. Credit History and Credit Score

Another major loan requirement of a bank is a thorough evaluation of the applicant’s credit record. In South Africa, credit bureaus like TransUnion, Experian, and Compuscan track financial behavior including repayments, defaults, and credit utilisation.

What Banks Review:

• Current credit score
  
• Total outstanding debts
  
• Late payments, defaults, or judgments
  
• Credit usage ratio (amount of used credit vs available credit)
  

A good credit score indicates responsible borrowing behavior and improves the chances of loan approval. On the other hand, a poor credit record signals risk and may lead to rejection or higher interest rates.

Minimum Credit Score for Bank Loans:

While each bank has its own criteria, a score above 600 is generally considered acceptable for personal loans. Home loans or larger credit lines may require higher scores or additional guarantees.

3. Affordability Assessment

As per the National Credit Act (NCA), banks are required to conduct an affordability assessment before approving a loan. This process ensures that the borrower is not being placed under financial pressure by taking on more debt.

Key Elements of Affordability Checks:

• Monthly income vs monthly expenses
  
• Existing loan or credit repayments
  
• Household expenditure
  
• Number of financial dependents
  

Applicants must submit:

• A detailed expense breakdown
  
• Bank statements that reflect regular spending patterns
  
• Any other documentation that supports the ability to repay
  

Outcome of Affordability Test:

If the affordability test fails, banks will either reduce the approved loan amount or reject the application altogether. Some lenders may suggest debt consolidation or budgeting advice before reapplying.

4. Identification and Documentation

Banks are obligated to verify the identity and legal status of every applicant before disbursing credit. This requirement is part of FICA (Financial Intelligence Centre Act) regulations in South Africa, aimed at preventing fraud and money laundering.

Mandatory Documentation Includes:

• Valid South African ID document or Smart ID card
  
• Proof of residential address (not older than 3 months)
  
• Recent utility bill or bank statement reflecting current address
  
• Valid passport and permit (for foreign nationals)
  

Additional Documents for Specific Loans:

• Home Loans: Property offer to purchase, building plans (if applicable)
  
• Business Loans: Business plan, tax clearance, CIPC documents
  
• Vehicle Loans: Quotation from dealership or vehicle valuation
  

Applicants who fail to produce these documents cannot proceed with the loan application, even if they meet all other requirements.

5. Deposit or Collateral (for Secured Loans)

While unsecured loans like personal credit do not require assets, secured loans such as mortgages, vehicle finance, and large business loans often need a deposit or collateral to reduce the lender’s risk.

a. Deposit:

Banks may require a deposit of 10–30% of the total loan amount depending on:

• The applicant’s risk profile
  
• Loan size
  
• Type of asset being financed (property, car, equipment)
  

A higher deposit often results in lower monthly instalments and better interest rates.

b. Collateral:

Collateral refers to an asset pledged as security for loan repayment. In case of default, the bank has legal rights to claim the asset.

Examples of collateral include:

• Property (for home loans)
  
• Vehicles (for car finance)
  
• Equipment or inventory (for business loans)
  

Collateral-backed loans are typically easier to qualify for and may offer larger loan amounts compared to unsecured credit.

Bonus: Additional Considerations Banks May Review

While the 5 core requirements cover most loan applications, banks may also consider:

1. Loan Purpose

Some banks request the borrower to specify the loan’s purpose, especially for large personal loans or business finance. A clearly defined reason can influence approval positively.

2. Age and Retirement Status

Applicants close to retirement age may have to demonstrate pension income or include a co-applicant to qualify for longer-term loans.

3. Marital Status and Spousal Consent

For certain types of loans (e.g., home loans), married individuals under community of property may need spousal consent before approval is granted.

Summary Table: 5 Main Loan Requirements of Banks