How do the banks see you?
Making an application for finance can feel pretty daunting.
You might think you have a pretty good grip on your finances now, but perhaps you didn't always in the past.
It's become a whole lot harder to hide black marks on your credit history since the introduction of comprehensive credit reporting in 2019, and that can leave prospective borrowers unsure as to what that means for a new loan application.
With that in mind, let's take a look at what lenders take into consideration when deciding whether to lend you money or not.
Your credit history
Before comprehensive credit reporting, it was rare for banks to share your personal information. This meant that if, for example, you missed a repayment on your credit card with Commonwealth Bank, it was unlikely to impact your home loan application with Westpac - unless you disclosed it.
This all changed in 2019 when the Government introduced comprehensive credit reporting, and banks began sharing their customers' loan and repayment history with credit bureaus. From then on, lenders could access a borrower's entire credit history.
This is where your credit score comes into play. Your credit score is a rating based on your debts, missed repayments and finance applications.
The higher the score, the more responsible a borrower you are, and the lower your score, the harder it is to gain approval. You can think of it like your financial pulse - except unlike your regular pulse, higher is better.
A great way to get some piece of mind before you approach a lender is to check your credit score. You can do it for free here at SocietyOne. This way, you'll have an idea of your overall financial health, and start making the changes you need to in order to appear more responsible to a lender.
Your income - and expenses
The more money you earn, the easier it will be for you to make loan repayments, which is why the banks take your income into consideration.
However, they won't look at your income in insolation. They'll likely take your expenses into consideration when they're assessing your income. Usually, lenders will take you through a list of expenses like insurances, phone and internet bills, electricity and gas bills, eating out, entertainment and travel.
This means if you're spending excessive amounts on takeaway or clothing, the bank will know about it - and it could reflect poorly.
Before you head to a lender, it's a good idea to print out a few months of your bank statements and trawl through them with a yellow highlighter. What subscriptions are you paying for? How many coffees are you buying?
If there's a lot of yellow, you might want to consider cutting your spending for a few months in preparation for seeing a lender.
Having savings is always a good thing - and not just for your own financial security. Savings will show a bank that you're responsible with your money, particularly if you've made regular contributions to your savings account each time you get paid.
However, they become particularly important when making a home loan application. This is because of what's known as the loan-to-value ratio, or LVR.
LVR is the percentage of the total value of the property that you'll be borrowing. For example, if a property is worth $850,000, and you have $170,000 in savings for the deposit, your LVR is 80 per cent - because you need to borrow 80 per cent of the purchase price.
Generally, lenders consider borrowers with a LVR of above 80 per cent to be riskier, or have a greater chance of the loan going into default.
Even before comprehensive credit reporting, debts played a large role in how the banks saw their borrowers.
There are certain debts the banks expect, like HECS or HELP student debts. However, if you have multiple debts at the same time, like a car loan, a personal loan and a credit card, banks may consider you to be a risky borrower.
Even if you've completely paid off your credit card, it will still leave a mark on your credit report - and if you've got a card with a large limit, this may be looked upon unfavourably by lenders.
So, if you're considering making an application for finance, you might want to consider paying down as much as you can off of your debts, or consolidating them into one. You can read more about debt consolidation here.
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