Loans with a low credit score: what to know before you apply

What does a low credit score mean when you want to borrow?

It means the record at the credit bureaus shows something a lender will weigh, such as late payments, defaults, a judgment or heavy existing debt. A lender uses that record as one input, and the decision to grant credit stays with the lender, not the bureau.

You are not alone. National Credit Regulator (NCR) figures for the quarter to December 2023 show credit bureaus holding records for 27.46 million credit-active consumers, of whom 17.56 million were classified in good standing. That leaves a large group whose records show some kind of strain.

A weak record also changes, and it is worth knowing where you stand before you apply. Our guide on how to check your credit score explains how to get your free report and read it.

What must a lender still do if your score is low?

A lender must assess affordability before it extends credit. The National Credit Act regards a credit agreement as reckless if the lender failed to carry out the required assessment, whatever the result might have been, and a lender must not enter into a reckless agreement.

The NCR says the affordability regulations require credit providers to verify your income before granting credit. For salaried applicants that means the latest three payslips or bank statements showing three salary deposits. For self-employed or informally employed applicants it means three months of bank statements or recent financial statements. The provider must also consider every debt repayment obligation shown on a registered credit bureau record.

Living expenses are tested against a minimum living expense norms table. If your declared expenses are lower than the table, the lender should ask you to complete a questionnaire. The NCR says some people under-declare expenses to improve their chances, and warns that giving false information can cost you the protection of the Act. Answer honestly, because an honest assessment protects you from a loan you cannot carry.

A lender can still say no. If it does, you are entitled to be given reasons, and you can ask which information it relied on.

Why can borrowing cost more with a low credit score?

The NCR notes that a healthy credit profile lets you qualify for credit at a lower interest rate than someone with an impaired record. A lender that sees more risk may charge more, offer a smaller amount, or ask for a shorter term. The law sets limits on interest and fees, and those limits change from time to time, so check the current ones with the NCR rather than relying on a figure from an advert.

The number to focus on is the total you will repay, not the size of the instalment. The pre-agreement statement and quotation must show the amount borrowed, the number of instalments, the interest, any additional charges, credit life insurance and the first and last payment dates. Put two offers side by side using these lines.

Credit life insurance has rules of its own. A lender may require cover that does not exceed what you still owe, and it must not demand insurance that is unreasonable or unreasonably priced. Read our guide to the cost of a short-term loan for a walk-through of how the parts add up.

What are the risks of borrowing with a low credit score?

The biggest risk is the debt spiral: borrowing a second time to repay the first loan, then a third to cover the second. Each loan adds cost, and each missed payment adds to a record that is already weak. The NCR warns that paying late or not paying in full will adversely affect your credit rating and your ability to take out credit in the future.

Short repayment terms raise the pressure. If a loan falls due on a date when your money is already committed, you may have to borrow again. Before you apply, check that the whole repayment fits your next income after essentials such as rent, transport, food and school costs.

If you already have several debts, ask whether one more is wise. Debt review, which we cover below, exists for people who are over-indebted, and while you are in it you cannot apply for further credit. That is a reason to get advice before stacking new loans on top of old ones.

• Do not borrow to repay another loan unless you have checked you can afford both.
• Do not use a loan to cover a regular monthly shortfall. The gap will return next month.
• Do not apply to many lenders at once. Each application leaves a lender enquiry on your file.
• Do not accept a loan whose total cost you cannot read in the quotation.

How do you avoid upfront-fee fraud aimed at people with bad credit?

Fraudsters target people who have been turned down. They advertise loans for any record, tell you the loan has been granted, and then ask for a fee first. The NCR is clear that an upfront payment for a loan is unlawful and that consumers should never pay a fee to receive a loan. Real charges appear in your quotation and are added to the loan or deducted from it.

The fee may be called insurance, admin, processing, legal costs, tax or a refundable deposit. The label does not matter. Another warning sign is a request for your bank card, PIN, SASSA card or ID as security. Keeping those items to secure a loan is a criminal offence under the Act, and you should never share a PIN or one-time pin with anyone.

Beware of the second wave too. The NCR warns about people who promise to remove your name from the credit bureaus for a charge, and says repairing a credit report is not a quick fix. Use your money to reduce and settle debts instead.

Any offer that sounds certain before anyone has looked at your income is a reason to stop. Check the company on the NCR register of credit providers, match its details to the register, and phone it on a number you found yourself. Our guide to loan fraud in South Africa lists more warning signs.

What practical steps can improve your position before you apply?

Start with the facts. Request your free report, which you are entitled to inspect without charge once within any twelve months, and check every entry. Wrong details, accounts that are not yours and debts you settled but that still show as open can all be disputed free of charge.

The NCR's message on a low record is encouraging: you can still improve it by paying or settling your debts and paying each instalment by its due date, though it is not a quick fix. Plan in months, not days.

Then build a small, steady pattern. A written budget shows how much you can safely commit. Even a small amount saved each month can prevent the next emergency from becoming a loan.

• Get your report from the bureaus and mark anything wrong or unfamiliar.
• Dispute errors with the bureau and keep the reference number.
• Pay every instalment on its due date, using calendar reminders and a debit order timed to your pay day.
• Make a plan for arrears, starting with a call to the lender.
• Hold off on new applications while you repair your record, because each one is recorded as an enquiry.
• Work out what you can repay each month after essentials and borrow less than that limit.

What are the alternatives to taking a loan with a low credit score?

The NCR's first suggestion for anyone struggling is to contact your credit provider before you miss a payment and try to re-arrange the payments. Lenders deal with this often, and an early call gives you more choices than silence. Ask for any new arrangement in writing.

If your debts are beyond what your income can carry, debt review, also called debt counselling, is the formal route. You apply voluntarily to a debt counsellor registered with the NCR, who compares your income with your basic expenses and debts and accepts the application only if you are over-indebted. The counsellor then negotiates reduced payments with your creditors, and a court or the National Consumer Tribunal must confirm the restructuring. The NCR says the process is not free, that all fees must be disclosed to you in writing, and that you do not need to borrow money to pay them.

Under debt review the bureaus place a flag on your profile, which the NCR says is not a negative listing, and you cannot apply for further credit until the debts are paid and the clearance certificate is issued. Weigh that carefully against your need.

Other options depend on your situation. They carry no legal weight in themselves, so put every arrangement in writing and keep copies.

• Borrow a smaller amount, or wait until you have part of the money saved.
• Ask your employer's HR team whether any staff assistance or salary arrangement exists, and get the terms in writing.
• Ask your stokvel or savings club whether members can draw on the pot, under the group's own rules.
• Ask a family member for help, and write down the amount and repayment dates so there is no confusion later.
• Ask the supplier of the bill you are struggling with, such as a landlord or school, for a payment plan.

How do you read a loan offer when your record is weak?

Ask for the pre-agreement statement and quotation in writing, take your time, and sign only when you are clear about the terms. Never sign a blank agreement. The NCR also advises borrowing only from registered credit providers, so search the lender's legal name or NCRCP number on the NCR register first.

Compare more than one offer. On Mzansi Hub you can compare the lenders listed on this site, and each lender decides for itself after an affordability assessment. We are not a lender, we do not make credit decisions, and we may earn a commission if you use a lender's link. The price you pay does not change.

Run the numbers before you click. Work out what you can repay from your next income, check the term and instalment dates, and see the total repayment. If the cost looks too high for what you need, that is a good reason to wait or look at the alternatives above.

• Is the lender registered with the NCR, and does the register match its contact details?
• Does the quotation show the amount, interest, fees, insurance and every payment date?
• Can you repay the full amount from your next income after essentials?
• Are you being asked for any payment, card, PIN or ID before the loan is granted? If so, stop.
• Have you compared at least two offers by total repayment?

Where can you get help if you are struggling with debt or a lender?

The National Credit Regulator can help you with complaints about registered credit providers and with finding a registered debt counsellor. Its call centre is on 0860 627 627 and its complaints email address is complaints@ncr.org.za. Confirm contact details on the NCR website before you use them.

The National Financial Ombud Scheme handles credit disputes with non-bank lenders, and the Credit Ombud deals with credit bureau complaints once the bureau route has been tried. Our guide on what to do when you cannot repay a loan sets out the steps in more detail.