Brian Katjaerua
Introduction
Our previous article clarified the term “credit” and the scenarios under which banks grant it. This article is more detailed and explains how customers apply for credit and what banks look for before extending credit to their customers. Once credit is extended to customers, they must comply with the terms and conditions of the agreement for the duration of the contract.
How do you obtain credit from a bank?
All banks offer their customers credit/loans or overdraft facilities. Often, the facility is part of a value-added service based on the customer’s income and the type of bank account, or the customer applies for credit.
Whether credit is granted or not is determined by affordability. In other words, can you afford to repay the loan over a predetermined period, considering your income and existing financial obligations? Banks calculate affordability by looking at the following:
Proof of income. Banks will ask you to provide pay slips as proof of income.
Six months’ bank statements. This requirement is for customers applying for credit at a bank where they do not have accounts or do not ordinarily bank.
Your balance sheet, which indicates what you own and owe.
Income and expenditure statements which is a list that shows your monthly salary or income and subtracts your expenses, such as water and electricity, to get to an amount you have left after your expenses.
For businesses, affordability is assessed through audited financial statements or management accounts which would show revenue versus expenses, as well as assets owned and existing debts.
Security/collateral
The bank will generally require you to provide security for certain transactions. Security is something of value that can stand, as surety for you should you be unable to pay your obligations. Examples of such items are assets used as support for a loan or other credit facilities, such as a home loan registered over a property, shares certificates, and life insurance policies. With a secured loan, the bank can dispose of the security if the loan is unpaid as agreed between the parties.
Before extending credit, the bank will:
Take all reasonable steps to inform you of the Terms and Conditions of the credit facility. You are responsible for reading and understanding the Terms and Conditions and seeking independent legal and financial advice to ensure that you understand and appreciate the risks and costs of the proposed credit and your rights and obligations under the credit agreement. Depending on the product or service, you have five working days from the first date an offer is made to indicate to the bank whether or not you accept the terms of the credit extended to you. It is important to remember, depending on which bank grants the credit, the offer may have time lapse clauses and is not open-ended, provided that you indicate your preference within the stated period.
Assess your affordability and willingness to repay the credit. This credit assessment may take into account a range of factors, but not limited to:
Your income, expenses, and statement of assets and liabilities.
How you have handled your financial affairs with the bank and other creditors in the past.
How you have conducted your previous and existing accounts with the bank.
Information obtained from credit risk management service providers and related services, and other appropriate parties, for example, employers, other lenders and landlords; and
Any Security/Collateral required.
Provide you with the costs and Terms and Conditions of the credit you applied for before accepting the credit agreement.
If the bank declines your credit application and you request the reason/s, the bank will provide you with the main reason/s in writing, which may include the following:
Your overall credit score (if available).
Information obtained from credit risk management service providers.
The outcome of their credit assessment.
Over-indebtedness; or
A specific policy of the bank.
For mortgage loans, the bank will discuss the following with you:
The operation and repayment of your loan, including all the charges and costs, the benefits of paying more, and the additional interest and fees should your account fall into arrears.
What you qualify for, the potential impact of interest rate changes if your bank offers different interest rates.
The possibility of losing your property should you not keep up your loan repayments.
To be careful when signing building progress payment documents, if applicable.
Your bank’s role in appraising (valuating) the property and the difference between a market valuation and the assessed security/collateral value of the property. Your bank will also discuss the minimum replacement cost placed on the buildings and improvements for insurance purposes.
To seek independent advice from duly qualified persons to advise on the structural quality of the property, compliance with local authority requirements and replacement costs of the buildings and improvements from the proper experts. (Your bank is not responsible for determining the structural quality or any defects in the property); and,
How are annual insurance premiums and other fees, charges, or administrative matters settled after repaying your mortgage loan?
For vehicle finance:
You are entitled to get quotations from various banks before entering a credit agreement with a specific bank.
If you are considering buying a previously owned vehicle, make sure you buy from a reputable dealer or individual and ensure that all appropriate documentation is available when arranging your finance facility. Obtain an independent inspection report from a reputable 3rd party before buying a used vehicle.
When you purchase a vehicle, your bank does not inspect it. The bank merely relies on the information you provide in your application for finance. Regarding the credit agreement, your bank regards the vehicle as security for the loan, i.e., an asset it can attach, and sell should you default on the loan.
In terms of the law and the credit agreement with your bank, it owns the vehicle and is the registered titleholder until you make the final payment required in terms of the credit agreement. Once you have settled your credit agreement, ensure that you get all the required documents from your bank showing that you are the registered, official owner and titleholder of the vehicle.
When trading your vehicle with a dealer, ensure that the credit agreement with your bank is settled and cancelled. Irrespective of what the dealer may say, you remain liable for the debt on the account until it is paid or cancelled. You may not ‘sell’ the vehicle without your bank authorizing the transaction. It is best to check personally with your bank. You must also ensure that the registration and ownership of the vehicle are transferred to the dealer or new client.
Your bank will require that the vehicle is suitably insured, and that proof of insurance is always available for the duration of the finance agreement. You may obtain your insurance through a broker and insurance company of your choice, or your bank will be able to supply you with a suitable insurance policy should you require one or fail to insure the vehicle adequately.
Your bank will require that you maintain the vehicle according to the original manufacturer’s specifications and comply fully with all relevant laws and regulations, including driver and vehicle licensing requirements.
Your bank is not responsible for vehicle conditions such as vehicle defaults or similar vehicle-related matters. These must be taken up with the seller of the vehicle.
You may not take your vehicle outside of Namibia without your bank’s, and your insurer’s written consent while it is still subject to the credit agreement.
Applying for credit is a straightforward process and is granted based on the accuracy of the documentation required by clients and whether they can pay back the loan over an agreed period. If ever clients find themselves in financial difficulty, they must speak to their bank immediately to discuss their situation.
*Brian Katjaerua is the Chief Executive Officer of the Bankers Association of Namibia.