Loan Affordability: How to Work Out What Loan You Can Actually Afford

Lenders must check that you can afford a loan, but they see your income and statements, not your life. You know about the school trip, the family obligation and the slow month.

A five-minute loan affordability check puts that knowledge to work before you sign.

How does a loan affordability check work?

It takes five steps and a calculator. Each step uses numbers you already know.

Step 1: What is your real monthly income?

Use take-home pay, after tax and deductions, not gross. If your income varies, use your lowest recent month, not your best.

For irregular earners see loans for the self-employed.

Step 2: What are your essentials?

List what you must pay: rent or bond, food, transport, electricity and water, school fees, medicine, airtime and data. Be honest.

Our guide to how to budget shows how to list them.

Step 3: What debt do you already repay?

Add every monthly debt: store accounts, cards, loans, vehicle finance and any debit orders. See debit orders.

Step 4: What is left for a new loan?

Here is a hypothetical example.

Now test real loans against the R1,800. These repayments use the legal maximums for a first short-term loan, so they are an upper limit.

A repayment that leaves under a third of what is spare is where loans become problems. There is no official rule, but a thin buffer is how a loan becomes the first of several.

Step 5: How would a bad month look?

Stress test it. What if your income dropped by 10%, or an unexpected cost of R500 arrived?

In the example above, a R1,156 repayment leaves R644. The R500 surprise would use most of it, and the next month would start behind.

What do lenders check about loan affordability?

A registered lender must take reasonable steps to assess loan affordability, usually by looking at your income, expenses and existing debts. That is a legal minimum under the National Credit Act, which the National Credit Regulator enforces. It does not replace your own check.

How do you use the loan affordability result?

• If you can afford it comfortably, compare quotes and choose the cheapest. See the guide to the pre-agreement quote.
• If it is tight, borrow less or choose a longer term, remembering that a longer term costs more overall. See loan terms.
• If you cannot afford it, do not borrow. Look at other options. See emergency loans.

What if you are already struggling?

Do not take another loan to cover gaps. Talk to creditors early and consider free advice. See what to do when you cannot pay your debts and debt review.

How do you work out loan affordability on an irregular income?

Use your lowest recent month, not an average. Here is a hypothetical delivery driver with four months of take-home pay.

The average is about R6,750, but the lowest month is R5,200. Test the loan against R5,200. If essentials are R4,300 and existing debt is R400, the amount left in the worst month is R500.

A repayment of R1,309 does not fit that month, even though it fits the average. Borrowing a smaller amount, or waiting for a steadier income, is the safer choice.

Loan affordability for irregular earners is about surviving the bad month, not enjoying the good one.

What if two people share the household costs?

Be careful with a partner’s income. A joint household can carry a repayment more easily, but only if the shared income is stable and you both agree. Work out your own share:

1. List your own income and the costs you personally pay.
2. Add your share of the shared costs, such as rent and food.
3. Count a partner’s income only if they have agreed to pay a part of the repayment, and it is steady.

If the repayment would only fit with money you cannot rely on, treat it as unaffordable. A loan agreement binds you, whatever your partner decides next month. See money as a couple.

How much buffer is enough? The two-surprise test

A buffer is what keeps one bad month from turning into a second loan. A simple test is to ask whether you could pay two surprises after the repayment. Here is the earlier example, with R1,800 spare before the loan.

A repayment that passes the two-surprise test is more likely to stay manageable. If yours fails, borrow less or take a different route.

How can you make room in the budget?

Sometimes a small change turns a no into a yes. Look for savings you can keep up, not just for one month:

• Airtime and data: a cheaper bundle can save R50 to R100 a month.
• Subscriptions: cancel one you rarely use.
• Transport: share lifts, or plan trips to cut a day of fuel.
• Food: plan meals, and buy staples in bulk.

A saving of R300 a month turns a repayment of R1,156 from tight to workable, because it adds R300 to what is left over. Our guides to how to budget and paycheck to paycheck have more ideas.

If you still cannot make it work, do not borrow, and look at emergency loans for the cheaper options first.

What should you do straight after the affordability check?

Write the numbers down: your lowest income, your essentials, your debt repayments and what is left. Keep the note with any quote you receive. When the real quote arrives, repeat the loan affordability check with its actual repayment, because the figures often differ from the advert.

If the repayment passes your own stress test, you can accept with confidence. If it fails, you have a clear reason to decline, ask for a smaller amount or look elsewhere.

A five-minute loan affordability check on paper costs nothing, and it is the best protection you have against a loan that looks fine on the day and hurts later.

Related guide: Quick loans in South Africa: what they cost and how to read the quote.

Frequently asked questions