Put simply, loans are a privilege and not a right. The company who is lending the money has exact and calculated rules that cover what they will and will not accept when it comes to approving a loan. Every lender has different guidelines and levels of risk that they are willing to accept. A brokers’ job is to know these guidelines backwards and find the best lender to match a person’s individual needs. Below are a few of the main reasons loans are declined by most finance companies and some tips on working around them:
Previous Bad Credit
If you have had issues in the past with paying a loan or credit card on time, or not repaying one at all, you might have a ‘default’ on your credit file. This can be also the case for power and phone bills. The company that lent you the money or the service have the right to mark your credit file with a default if you don’t follow the contractual guidelines with them. Defaults are ‘black marks’ on your credit file that are designed to prevent your from getting any more finance and to alert other financiers you have had problems in the past.
Everyone has a credit file and it is the first port of call for all lenders when making a decision if they will consider an application or not. People with defaults on their credit file are statistically a ‘bad risk’ and most mainstream lenders, including banks will shy away from continuing any further with the application.
Obviously there are differing reasons for a default, and also some are more severe than others. If you have a default on your file and you don’t believe it is correct, you can approach Veda Advantage (the company that holds and maintains all the credit files) to have it amended and fixed. If it is correct, it needs to be at least marked as paid or under an arrangement to pay back before you can apply for anymore finance.
Some lenders are less concerned with one or two defaults on a credit file and more interested in your current financial situation. They will ask for things like bank statements and tax returns to show a more complete picture of how you are handling your finances currently, and use these to make a decision on the finance rather than just relying on the credit file. These lenders are known as ‘risk lenders’. As brokers we specialise in assisting with risk lenders and can help you every step of the way. Having a default or two is not the end of the world, and in most cases will not prevent you completely from accessing a reasonable amount for a car, motorbike or boat purchase.
Insufficient Income
All lenders in Australia are governed by the National Consumer Credit Protection Act (2009) which dictates to lenders and brokers alike how they are able to interact with customers seeking finance, and in particular what rules they must impose when making a decision if they will lend money to someone or not. One of the requirements is a Lender must decide if by granting the loan to someone they will not put a person in a position of hardship.
For this reason, each company imposes a ‘living expense’ for each person that applies for the loan approval. This covers the cost of normal living like groceries, fuel, electricity, insurance, entertainment etc. If you have an income that is deemed to be lower than a typical cost of living and the proposed loan repayment combined, you will most likely find it difficult to obtain a loan, even if your credit file is clear and you have paid off loans perfectly in the past. This is because the lenders are under strict guidelines to ensure giving you the loan won’t impact on your ability to live normally. You might say you don’t spend much on groceries or your power and phone are free, but unfortunately the living expenses are set down across the board and cannot be altered or changed.
There are some options that we can review such as consolidating other debt to reduce the overall outgoings you have each month or perhaps seeking a smaller amount of finance that will fit within your affordability levels, however both of these options need to be checked to ensure they not negatively effecting your overall financial situation.
Your broker can help you navigate through your affordability, and will help you find out if you would be eligible for a loan and if so for how much, without making your credit file busy.
Non-Permanent Residents
People who are living and working on a visa in Australia but not a permanent resident can access finance, however there are very strict restrictions on granting these loans. These restrictions are as follows :
• Only certain Visa’s are eligible to be accepted (457 being the main acceptable visa) – for a full list of eligible Visa’s please contact us.
• The loan term must be 3 months less than the end date of your Visa.
• Your Visa must enable you to stay in Australia either indefinitely or have a set end date. Bridging Visa’s or Visa’s that are designed as an interim while a decision is made on eligibility to remain here is not acceptable.
• Most lenders will require some sort of upfront deposit (usually between 10 and 30% of the purchase price of the car)
We have a vast experience in assisting people on a work Visa to get a loan. If you have any further questions please just give us a call or an email.
First Time Loans
If you have been working in your first job for a while and would like to get your first loan for a Car or Motorbike, you will need to wait until you are 18. Lenders are legally unable to offer you a loan contract or an approval until you turn 18 years of age.
People over 18 who are applying for their first loan may find it difficult to get approved straight away, however it is possible. Here are some tips on getting your first loan approved :
• Apply for a reasonable amount for your first loan. It really is a case of crawling before you walk, prove you can easily handle a smaller loan and step up from there. Applying for a $40k car loan as your first lend will most likely not be approved and only show the lender you are not being reasonable with your understanding and ability to repay such a large loan.
• Save some deposit, even if it is only for 12 weeks prior to applying. If you approach a lender with proof that for the last 12 consecutive weeks you have saved the same amount as the loan repayment you have applied for, it will go a long way to getting your loan approved and show the lender you are in control of your financial situation and can afford to live without the money for the loan repayment each week. Lenders love to see in black and white some comfort or proof that have the ability to repay a loan.
• Look to purchase newer model vehicles. The older the vehicle the higher risk is represents to a Lender. Newer late model items are much more attractive for a Lender when considering a younger borrower and will assist in getting your loan approved. To purchase an older car (say older than 10 years when you buy it) you will realistically need to get a Personal Loan as most Finance Companies will not consider a vehicle that old for a secured car loan.
• There are some myths around that getting a Mobile phone contract or small credit card will assist in getting a credit rating. We have seen no proof of this actually helping at all and realistically if you apply for both of these shortly after turning 18 and then try for a loan as well you are almost certain to be declined as your credit file will be too busy.
These are all fairly generalised tips and statements. I find it always help to remember that getting approved just means the Lender who you are asking to borrow the money from is satisfied that you will most likely pay it back. The interest rate is a representation of how much risk there is you won’t pay it back (i.e the higher the rate the higher risk you pose to the finance company that they won’t get their money back) and the amount you can lend depends completely on your individual situation.
The more stable you are in your job and residence, the more you earn and what you do with your earnings, how you have conducted yourself paying back loans, phone bills and power bills before, how much savings you have put away, all go together to paint a picture for the lender. Prove to a lender you can and will pay it back and you will find yourself with a brilliant approval in no time.
