There are some things in life that can feel pretty terrible and one of those things is being declined for finance. Worse still is not really understanding why. You may think, I have a good stable job, I am pretty good with bills and paying back loans… why?
First Step
Get through the emotional reaction
It’s natural to feel angry, upset, and confused. Being declined can affect your current and future plans. It could be coming at a bad time when you have already sold your old car or need a new car for your job or family. Finance is about facts and figures. As hard as it is, it is important to get through the emotions you are feeling and start to look logically at the situation.
Most common reasons for finance declines
- Insufficient income compared to the loan
- Bad credit history
- Excessive or high debt compared to your income
- Insufficient savings history
- Poor Banking conduct
- Irregular income
- Unsuitable loan reason
These are the most common, but there can be some really simple reasons why your loan has been declined by a bank or lender.
Lending Criteria
All approvals and declines are determined by specific lenders by lending criteria. Lending criteria are the specific rules or conditions a lender needs you to fulfil to lend you money at an advertised rate or be approved. Lenders have very specific lending criteria for their loans. Banks and lenders advertise rates that seem great on the surface. You see ads all the time on Google search results and social media ads. The fine print in the ad will direct you to lending criteria.
For example, one lender may require
- A Comprehensive credit score above 600
- Have a certain income
- Have a certain level of expenses
- Loan to value ratio (the value of the item you are buying vs the amount you are borrowing)
- Age of the asset you are buying (eg car)
- Been in full-time employment for at least 6 months
- Have no payday lending enquiries
- Pay all bills on time and in full
- Have no history of defaults or poor repayment history on other loans
- Be over a certain age
- Have a full open licence
If you are declined for finance, you can ask why, but usually, a lender will simply tell you that you didn’t meet their criteria, but they may not tell you which specific criteria you did not fulfil. You will have an opportunity to clarify, but generally, a decline is not overturned. You will have an enquiry on your credit file and it will be more difficult to then get a loan.
There will be differences between specific lenders and even their products as well. Some lenders specialise in assisting people with poor credit history. They carry a much higher risk with an individual who has a poor credit history, so the interest rate they charge is usually much higher than a lender who only takes on low-risk clients.
Understand your credit score and which lenders match
This is important. Your credit score will determine which lenders you are likely to be approved by.
If you have a negative history in your credit file, you may not be approved through tier one lenders. This means that your only option may be Tier Two lenders. Tier Two lenders carry more risk and therefore charge higher rates.
What to do if you are declined for finance
The first step is to STOP applying for finance immediately. If you have been declined it is important to understand why.
Ask the lender. Simply asking the reason for the decline may give you the answer. Some lenders will just say “Lending Criteria” or provide a vague answer that doesn’t really help. A good broker will work with you on the issue as they will understand the reason for the decline. If you are faced with a situation whereby you have no real tangible reason, it’s time to do some digging for yourself.
Request a copy of your credit file
Every person who has ever applied for finance has a credit file. This records all the loans you have applied for, your repayment history and the amount of finance – along with your personal information such as address and current employer. Your credit file also has a CREDIT SCORE. This number is a quick view of your credit worthiness. See here for more information about credit scores.
You can pay for a copy of your file to receive it immediately (or within 24-48 hours) or there are free services (which take longer)
Equifax
https://www.equifax.com.au/personal/
Experian
http://www.experian.com.au/order-credit-report/
Illion
https://www.checkyourcredit.com.au/
Once you have a copy of your credit file, go through the file starting with the score. The lender you were declined by may have a minimum score requirement. That will be your answer. It’s then time to start improving your score if you want to go through that lender in the future, or you have to accept that you may need to find a lender who will provide funds to you based on your current score.
It’s really important that if there is any adverse history such as late payments on current loans, or defaults that you take action if the information is not correct. Credit files can have mistakes.
Understand the other aspects of your finances
If you cannot see any adverse information on your credit file – the next step is to have a look at your banking conduct. Most lenders require borrowers now to provide 3 months of bank statements via electronic request. What the lender is looking for is good banking conduct. They can see income, expenses and what you spend your money on. It may feel like an invasion of privacy, but the fact is, these are the rules.. if you want to borrow money, you have to comply and provide it.
The other reason this is standard practice now is brokers, banks and lenders are required by law to ensure that the loan they are providing is not unsuitable. The only way to determine this is to gather information such as income, expenses, and liabilities and work out whether there is a risk of the loan not being paid back putting you into a negative situation.
When applying for a loan, a lot of people will overestimate their income and underestimate their expenses, even forgetting some expenses they have. (on purpose or not)
Bank statements provide the evidence the lender needs.
Gambling
With so much advertising and pressure to gamble, it is more and more common for the average Australian to have a flutter.
Excessive gambling through online apps or withdrawing cash at the local RSL or club can indicate a risk to the lender. In this modern age, withdrawing a lot of cash from your account can also be a negative.
Payday Loans
Short-term loans are unsecured loans for less than $5,000. These are commonly advertised on TV and Social Media as being an ‘easy solution’ to cash problems. To a lender, it can indicate that you are unable to manage your finances. It is best to stay away from short-term loans. Because most of these services use direct debit for payment – they will show on your bank statements whether you have disclosed them or not and the lender will take them into consideration (usually negatively)
Bank Tools
You can go through your own bank statements, or, most major banks have tools in their banking apps that categorise your spending and income.
If you don’t have a bank that does this, it will take a bit of work, but enter each transaction into a spreadsheet and categorise each item.
- Savings
- Food
- Utilities
- Insurance
- Rent/Mortgage
- Takeaway
- Entertainment
- Gambling
- Etc etc.
Once you have a good understanding of your spending, savings and income – you can spend three months improving it. (as 3 months of banks statements are what a lender is looking for) before you re-apply.
Serviceability
One of the reasons you could be declined is simply your income and expenses do not allow for you to take out a new loan.
That is; when you add up your expenses and deduct them from your income, the lender has identified that there is not enough capacity. You may see that you have enough funds left for a loan, however, it’s not as simple as that. Under the Responsible Lending Rules, a lender has to ensure that the loan is not ‘unsuitable’. They have calculations that may be different to yours. Lenders use benchmarks to calculate living expenses. That is; they use data, based on your suburb, your family size and even your age they work from a baseline of expenses. As discussed, most people overestimate their income and underestimate their expenses. Lenders know this and that’s why benchmarks are used.
Also, some lenders have a buffer on top of the benchmark to ensure that if your circumstances change (lose a job, rent goes up, interest rates go up on your home loan etc) that you will still be able to pay the loan. This is responsible and fair, but it doesn’t feel that way.
Next Steps
If you’ve been declined, it’s really important to not respond out of emotion and keep applying. We see this all the time and it just causes frustration and long-term pain as those additional applications which are inevitably declined start to erode your credit score. Talk to a broker who can take the time to understand your circumstances and guide you towards being approved. It may take a few months, but importantly, you will have a loan that is suitable.
The information in this blog post is general in nature and does not constitute personal financial or professional advice. It is not intended to address the circumstances of any particular individual. We do not guarantee the accuracy and completeness of the information and you should not rely on it.