When applying for personal loans, every single detail is carefully assessed, even your postcode.
This does not mean you should be spending hours agonising over an application. However, here is some information to help with your loan application so you can get your “stamp of approval.”
1. Do You Match The Eligibility Criteria?
To begin with, you have to be eligible when it comes to applying for personal loans. You will need to:
- Be a minimum of 18 years old
- A permanent Australian resident
- Currently be earning a gross annual income that exceeds $24,000
- Have no defaults when it comes to credit cards or loans you have had in the past 5 years
- You have not been declared bankrupt in the last 7 years
2. What Does Your Previous Lending History Show About You?
Your lending history will be thoroughly reviewed when you apply for your personal loan. However, loans that do not have something held as security or collateral by a lender or, unsecured loans, are scrutinised the most.If you have previously maintained regular payments in the past, this is considered favourably when it comes to credit cards and personal loans.
There is actually no way around this, so the ideal thing to do includes always making your repayments on time, so your credit history remains clean. You should also check on your current credit score, to find out the state of your credit history.
3. Can The Lenders Bank On Getting The Money Back From You?
The lenders usually determine your risk level by reviewing your liabilities and assets. You can gain a basic idea on your actual net worth when using this calculation:
Assets, which is anything that you own, (subtract) less payments that are owed to someone else, or debts = Net Worth
If you have liabilities which are more than your current assets, the responsible lenders will usually not increase these liabilities with new debt.
Top Tip: When you calculate your liabilities, ensure you are only including your portion for your debts. For example, if you have a home loan which is shared with your partner, then only list the amount of your share for this loan, opposed to the entire amount. You can also include your savings under your assets as well as any that are in term deposits.
4. Are You Regarded As Stable?
Address and employment are 2 ways in which lenders will assess your stability. If you are no longer on probation and you have been with the same employer for over 3 years and you have lived in the same residence for more than 2 years, you are viewed more favourably.
This is not always realistic for everybody, so here are a few things that you are able to do:
- Self Employed. Show you business activity statements or your tax return for the last year as the benchmark that will indicate your earnings annually.
- Commission Salary. If you have commissions that are paid annually, ask your employer for a letter that outlines your expected commission and salary.
- Apprenticeship. If you are close to the end of an apprenticeship and they are keeping you on full-time then ask your employer for a letter to confirm these details.
Residential stability may be challenging when you are still living with your mom, dad or both or you happen to move around often. It works in your favour when you own your own home, or you are able to show a lease that is signed for 6 to 12 months.
5. Are You Able To Afford The Loan Repayments?
The lender needs to know whether you can afford your loan repayments comfortably. This is when they assess your expenses and income to ensure that you have what is known as “excess capacity” which means your income has been determined as higher in comparison to your expenses.
They also want to know if you have a buffer for life events that are unexpected such as when you have a baby or an increase in bills that will not strain your finances. The lenders might also utilize industry benchmarks like the HPI (Henderson Poverty Index) and the HEM (Household Expense Measurement) as the baseline when they assess your application.
Top Tip: Similar to liabilities and assets, ensure you only list your actual expenses, like your portion of groceries or rent, and not the entire households.
6. Your Life Stage And Age May Also Have An Influence
Your life stage along with your age also plays a role. For example, if you are 21, your age is not the issue, but it is more than likely that you have not yet built-up employment and residential stability, a high income or an asset position that is strong. Similar to lending history, there is no way you can get around this, so make sure you satisfy other factors that have been mentioned above.
What should you have prepared when applying for a loan?
- Proof of identification
- Proof of your address such as a bank loan, rental agreement or utility statement
- Tax returns, payslips or your business-activity statements
- An employer’s letter
- Bank account
- Rental agreement
Dependent on what you need the loan for, when the full amount has not been approved, do not immediately reject the lesser amount. The small loans can still assist when you are interested in debt consolidation.
If you are approved for a loan of $10,000, how would you like to use it? Will the money go towards consolidating your debt, a holiday or to revamp one of the rooms in your home? Feel free to comment below.