If you’re preparing for a new vehicle purchase that you are going to finance, it’s a good time now to review your ‘match fitness’ for finance. Things have changed dramatically over the past few years when it comes to finance. Here are my top tips in preparing your credit profile.
TIP ONE: Banking Conduct
What has your personal banking conduct got to do with getting a loan? Everything. Under Responsible Lending Rules, lenders and brokers need to ensure the loan is ‘not unsuitable’. What I find as a broker is people UNDERESTIMATE expenses and OVERESTIMATE their income. Most people don’t have a good handle on their finances and don’t know off the top of their head how much they spend on Mcdonald’s each month for example.
The bank statements are a point of truth. It shows your actual expenses vs your income. Bank statements also show good and not-so-good conduct. Not-so-good conduct could be regular over-drawn, days in negative balance, dishonours on direct debits, excessive gambling, high cash withdrawals.
Lenders will scrutinise this as a measure to understand if you have the capacity (ability) to pay a loan on top of your current expenses. There are few lenders who don’t require bank statements these days, as a broker, I will request these first to ascertain any red flags. Lenders require 90 days, so you have time if you are looking to the future to ‘clean up’ your banking conduct.
Bank statements are gathered by using a service called Illion. You use this service for free and it provides your broker a report. Most lenders do not accept ‘manual’ statements. (scanned for downloaded from your internet bank) due to fraudulent ‘doctoring’ of statements. The good things is, you will know before any application is submitted whether there are any potential issues if your broker knows what they are doing!
TIP TWO: SHORT-TERM LOANS
I know those ads on TV with the guy or girl talking about an ‘unexpected’ problem and no money. Oh it’s easy with Mollet Mizard! Just go online and get between $500-$5,000 same day.
LOOKOUT! It’s a TRAP and TOXIC for loans in the future!!
Anything under $5,000 is usually what is called a Short-Term Loan or a Pay-Day Loan. It kills your credit score, makes you look like you don’t have control of your finances and lenders will bump you down the tree as far as a competitive rate with a lot of lenders not accepting anyone who have had a short-term loan in the past 6 months.
Don’t think you can hide short-term loans as it will show on your credit file as well as in your bank statements. If you currently have short-term loan/s, pay them out as soon as possible. You will need to wait 3 months generally after the final payment for these to drop off your bank statements.
Find another way if you are short of cash, just stay away from short-term loans if you want a competitive interest loan in the future
TIP THREE: KNOW THY SCORE
Credit scores are how you will be judged by lenders. Different lenders specialise in different score ranges and their interest rates reflect this. Your score is an indication of your credit worthiness. I have people all the time telling me that the rate they have been offered is ‘too high. Sir?Madam, your score is 440 out of 1200. I had to work really hard just to get you approved at the rate you got!
I see a lot of people rating themselves higher than they are not knowing how it works.
A ‘good’ score doesn’t start till you hit 650. An excellent score is over 850. Average starts at 500. Bottom line, the lower your score, the higher the risk to the lender, and the higher the rate you are going to be given.
Bonus: When you complete your assessment with me, I’ll tell you your score and what I see in your file that contributes to it, how to improve it if it’s low and how to maintain it if it’s great!
TIP FOUR: PAY BILLS & LOANS ON TIME
Credit Reports contain a lot of information. Something a lot of people don’t know is that lenders report payments on existing facilities like credit cards, personal loans, mortgages, short-term loans etc as RHI’s. (repayment history information) If you are a late payer on these facilities, these are reported as late. Late payments are a red flag for lenders, it also reduces your credit score!
TIP FIVE: BUY NOW PAY LATER
All loans are essentially ‘buy now pay later’. There are different types of loans and some have a positive impact on your score and others do not. Buy-now-pay-later has been a game changer for a lot of people and retailers. It can also be a trap. These are reported on your credit file and if you have multiple accounts with different providers it can hurt you. If you’re going to use BNPL facilities, you’re better off sticking with one at the most two. Don’t overextend yourself with the lure of getting an item and paying for it later.
TIP SIX: DEFAULTS
Defaults are one of the worst things that can appear on your credit file. I see it all the time when someone has moved house and forgotten to update their billing address for the final bill. It goes to a collection agency that places an unpaid default on your credit file. I’ve seen some loans fall over due to an $800 final power bill.
If you have a default, you need to get it paid and cleared. It will show on your file for a few years, but it will be marked as paid. As long as there is a story or explanation for the default, most lenders will overlook 1 or two non-financial defaults (power bills, telco bills etc). Financial defaults are a little trickier. Following tip four, always pay your bills on time or get in touch with the provider straight away if you are facing difficulties.
TIP SEVEN: CASH WITHDRAWALS
When we are calculating your expenses from your bank statements, cash withdrawals are treated as expenses. Even if you are stuffing the cash in your mattress, it is showing that the money has been spent. This can be offset if you are purchasing an asset for cash, but spending it down at the pub or shopping just means it’s calculated as a living expense.
Cash withdrawals from places that offer gambling (like clubs or pubs with Pokies or Casinos) will be a big red flag. If you do like a flutter now and then, withdraw your cash from an ATM not linked to a place of gambling. Always remember that bank statements are the ‘document of truth’ for your expenses and most lenders require them to validate your claimed or reported expenses.
TIP EIGHT: KNOW THY LENDER
There are thousands of ads online for car finance. You are probably getting served them on Facebook, on other websites because you have googled it at some point. You even responded to an ad that led you to me!
To stand out, advertisers promise really low percentages in rate. It’s not that those rates don’t exist but a lender will have a really low rate for a person that fits perfectly into their criteria. When I say perfectly, I mean perfectly. Credit score over 900, owns or has a mortgage, has a 15% deposit, and must be a new or demo vehicle and has perfect banking conduct.
Each loan product and its accompanying interest rate has criteria. Each lender has different criteria for what seems quite the same product!
A broker navigates this complexity for you. If you go it alone, you NEED to read the fine print before applying. As with TIP 9 – you get 1 or maybe 2 shots at it before it negatively affects your credit score.
TIP NINE: ONLY APPLY FOR FINANCE YOU NEED
This is super important. When you apply for credit it appears on your credit file as an “Enquiry”. If you apply for loans in a short period of time, especially the same type of loan (eg a car loan) it is known as ‘Credit Shopping’. In the credit world and for the purposes of your credit report, this isn’t good.
You should do your research on the lender rather than apply and hope for the best. I’ve seen credit files with dozens of enquiries in a 3 month period because the borrower was getting declined, but not getting told why. They just kept going from lender to lender hoping for the best. Unfortunately, their credit score was severely impacted to the point their only option was to wait 12 months without applying anywhere.
TIP NINE: SAVE SAVE SAVE
How many times I have heard this line. “When I have the loan, I will stop spending on silly stuff“. Some people magically think once a loan is in place they will change the habits they have gained over years. The lender wants to see that you have the capacity to pay. That’s how they make money. Lending you with interest. Lenders don’t care what you promise to do in the future, they care about what you have already been doing. This is the behaviour they are interested in.
That’s why a broker like me will ask a lot of questions about income and expenses. I want to see that you have uncommitted income each month that will service a loan. If you currently have a loan and will be closing that loan with the new facility, that’s fine. It shows you have a history of paying and a history of being able to handle credit.
If you haven’t got history, (which is known as confirmable credit) you NEED TO SAVE the equivalent of the loan or at least most of it, over 3 months before applying. I can’t count how many times people who have done this were approved in less than an hour. Lenders use computer algorithms to judge you. It’s rarely a human being. Savings are essential.
The benefit is, that you will be in the habit of saving – and the loan will be a breeze.
TIP TEN: THE ASSET MATTERS
Did you know that a new or 1-2-year-old car will attract a LOWER interest rate than a 5-6-year-old car? Why?
Older cars present a risk to the lender. If you default on the loan, the car is secured as collateral. They will sell the car to recoup their money.
If the car is too old – the value will continue to decrease and there is more risk to the lender so they will put a premium on the interest to ensure they get their money back. There are also rules around the age of the car (usually no older than 15 years at the END of the term of the loan you are wanting to take out) and how many kilometres are on the clock.
If you can’t afford a new or near new car, you just have to accept the premium. Use this loan to create the reference history, pay the car off and then use its value as a deposit on the next car which is hopefully newer. Keep ‘trading up’ until you can afford a new or near new car to get that premium rate.
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