Can You Afford a Loan? A Budget Check Before Borrowing
The most important question to ask before taking out any loan is not whether you will be approved, but whether you can comfortably afford to repay it. A lender is required to assess your affordability, but you know your own situation best. A short budget check before you apply can save you a lot of stress later.
Why affordability matters
A loan solves a cash-flow problem today by taking money from your future income. If the repayment leaves you short next month, you may end up borrowing again just to cover the gap. Checking affordability first helps you avoid that cycle.
In South Africa, registered lenders must assess whether you can afford a loan before granting it. This protects consumers from reckless lending. Our article on your rights as a borrower explains this in more detail.
Step 1: Know your take-home pay
Start with the amount that actually lands in your bank account each month, after tax, UIF, medical aid, pension and any other deductions. Use your latest payslip or bank statement rather than your salary before deductions.
If your income varies, use the lowest amount you have received in recent months. It is safer to plan on a conservative figure.
Step 2: List your fixed expenses
Fixed expenses are the amounts you pay every month whether you like it or not. Write them all down:
- Rent or bond repayment
- Existing loan and credit card repayments
- Insurance premiums and funeral policies
- School fees and childcare
- Transport costs, including taxi fares, fuel or a car repayment
- Cellphone and internet contracts
Step 3: Estimate your variable expenses
Variable expenses change from month to month, but you still need to plan for them:
- Groceries and household supplies
- Electricity and water
- Toiletries and medicine
- Support for family members
Look at your bank statements for the last few months to get a realistic figure. Most people underestimate these costs.
Step 4: Work out what is left
Subtract your fixed and variable expenses from your take-home pay. The amount that remains is what you have available each month. Any loan repayment must fit inside this amount, with room to spare for the unexpected.
Step 5: Test the repayment
Now look at the loan itself. Use our loan calculator to see the total amount you would repay. Then ask yourself:
- Could I pay this amount on the due date and still cover my essentials for the rest of the month?
- Would I need to borrow again next month to manage?
- What would happen if an unexpected cost came up in the same month?
If the answers worry you, consider borrowing a smaller amount, or look at alternatives such as asking the company you owe for a payment arrangement.
A worked approach, without the jargon
Imagine your take-home pay is the same each month. Write it at the top of a page. Below it, list your fixed expenses and add them up, then do the same for your variable expenses. Subtract both totals from your pay. If what is left is small, a loan repayment will squeeze your budget even if you are approved. If what is left comfortably covers the repayment with money to spare, you are in a much stronger position. Repeat the exercise for the month in which the repayment falls, because some months, such as January, carry extra costs.
A quick affordability checklist
Before you apply, you should be able to tick every box:
- I know my take-home pay for the month
- I have listed all my existing debt repayments
- The repayment fits into what I have left after essential expenses
- I will not need another loan to repay this one
- I have compared the total cost with other options
Ways to make room in your budget
If the numbers are tight, a few changes can help:
- Cancel subscriptions and services you rarely use
- Plan meals and shop with a list to reduce grocery spending
- Compare insurance and cellphone contracts when they come up for renewal
- Pay off the most expensive debt first
Over time, these savings can help you build an emergency fund so you need to borrow less often. Our guide on building an emergency fund shows you how to start.
How lenders assess affordability
When you apply, a lender looks at similar information: your income, your expenses and your existing debt, along with your credit record. That is why you will be asked for proof of income; see what documents you need to apply. Being honest about your expenses is in your own interest, because the check exists to stop you taking on a repayment you cannot manage.
The bottom line
A loan should solve a problem, not create a new one. Do the budget check first, borrow only what you need and make sure the repayment fits. If you want to understand how our loans work before you apply, see our how it works page.
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