It’s a fact of life now with most loans requiring bank statements to assess an applicant. Credit worthiness is about proving to a lender that you are a low risk to paying back the loan.
In 2021, around 2.7 million people had a car loan. The average spend was $40,700. That’s over $109 Billion dollars in loans that lenders of money have to reduce risk on.
What is banking conduct?
Every time you tap your phone or card, there is a direct debit, you transfer funds internally (to a different account) or externally, withdraw cash or have money deposited into your account it creates a record. A transaction history.
Analysing transaction history can create a picture of the person, especially their money habits over time. This is what lenders are interested in. It is a very good indicator of your true financial profile and is a key factor in getting a loan.
What is a lender going to look at?
Withdrawals vs deposits
Your banking will prove your expenses and prove your income. It used to be that a payslip or a letter from your employer would suffice, but with so much fraud lenders looking to evidence in your banking history. Most people don’t really know how much they spend each month, tapping the phone or card has made it so simple to spend. It doesn’t feel like real money. Your transaction history will demonstrate how much you spend and what you spend on. This is really important.
Financial commitments
As a broker, I’m going to ask you upfront what loans you have, with whom, and the limits and repayments. Still, a good number of my clients don’t fully disclose. I form a view of which lender is going to be suitable for the applicant and then ‘bam!’, the bank statements reveal a pay-day loan or an undisclosed credit card. Trying to hide debts will not work. Debts with either show up in your bank statements or your credit file. Most times both.
The bottom line, loans form part of an individual’s cash flow. Money in and money out. What’s left over is what could service (pay for) a new loan.
Account clearing
A big flag for me as a broker and a lender is accounts that are cleared a day or two after deposits (wages or income). Depending on what the money is being spent on, it can indicate that an applicant is living close to the edge. It could also mean the applicant has a renovation going on and spends all their spare cash at Bunnings. It’s about context, but if I see accounts close or at zero within a few days of being paid, I question the affordability of taking on a new loan.
Cash withdrawals and gambling spend
It’s pretty clear that if a bank account report shows large cash withdrawals at a Casino on a regular basis that the money is being spent at that time, on gambling. This along with online gaming apps and withdrawals at clubs/entertainment places that have pokies. Large volumes of money spent on gambling can be a red flag and lenders have limits as to how much as a percentage of income they will accept. Gambling can indicate a high risk for lenders.
The bottom line, cash withdrawals are counted as ‘unknown’ expenses. It may not be a bill or groceries that the money is being spent on, but each time cash is withdrawn it counts.
Pay Day Loans
I see this so often and more so since COVID. Payday loans are a cancer and one of the biggest reasons a client may be declined or not be eligible to go through a particular lender or get a good interest rate. Payday loans, or short-term loans are high-interest expensive forms of finance and can demonstrate that the person cannot manage money. I completely understand there are times when cash is short, but staying away from short-term loans is essential.
Dishonours, overdrawn
Everyone probably has missed a direct debit in their lives. One or two in a year is usually ok, but when direct debits are consistently reversed it creates a record called a dishonour. Going into a negative balance (if you have an overdraft) can also create a negative view as it is a form of credit.
Promise vs history
I hear this all the time – “when I have a loan, I’ll do better”. This is generally referring to spending. A loan doesn’t magically change someone’s habits. Lenders aren’t interested in your promise – the contract binds you to repay the loan – they are interested in whether you are a good risk or a bad risk. Your banking conduct can demonstrate this. Lenders usually require 90 days of statements, so if you have any of these issues in your banking conduct, time to sit down and clean it up. It may mean you have to wait 3 months to get a loan, but that is far better than getting a higher than deserved rate or worse, a decline.
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