Why short-term loans can jeopardise your home loan application
Aspirant homeowners are advised to exercise caution and financial responsibility when it comes to using credit.
This may be the case even while they are keeping up with repayments, says Renier Kriek, Managing Director at alternative home finance business, Sentinel Homes.
While all debt should be managed responsibly to maintain a good credit score, for many South Africans, short-term loans have become a way for citizens to make ends meet, or to fund luxuries they cannot afford but refuse to live without.
Credit providers use various risk models to identify patterns in potential customers' spending behaviour-good and bad. They know what financially responsible and irresponsible spending patterns look like.
'Frequent short-term loans-with or without defaulting-are a risky pattern that implies an individual does not manage debt well, and that is something a home loan provider does not want to make a long-term investment in.
'The ability to delay gratification is the underlying attribute that responsible users of credit have, but there is no easy way to quantify whether a particular applicant possesses that trait – the number, frequency and type of unsecured credit transactions is a useful proxy in that regard.'
Kriek said the right course of action, especially to those who already have short-term loans is to first, understand that short-term loans have their place but are seldom necessary. He urged these customers to stop using them and make a plan to pay off the ones they already have. Then they should get to work on building an emergency fund of cash that can only be touched for true emergencies, so that they will not need unsecured debt in those cases, he said.
Secondly, he advised aspirant homeowners to work on saving for luxuries such as holidays and large capital purchases. He said they will be paying monthly anyway, whether they take the credit or save, but in the saving scenario, interest will be working in their favour rather than against them. He added that delaying the gratification of that large purchase is difficult, but no-one said adulting would be easy.
Finally, Kriek said if there is no other option, they must opt for 'good' debt as far as possible. He said they should buy their clothes, furniture, appliances, groceries and other items using store credit if they absolutely cannot do without. He said they do not have to buy things they do not need to build a good credit score as everyday items and normal household purchases are fine.
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