Credit

Been declined for finance?

Being declined for finance can be extremely hard to cope with both emotionally and financially.  You may have had your heart set on a new car, a house or just to get a personal loan for a holiday, so dealing with the feelings of rejection can be difficult.

All humans go through stages of accepting changes in their lives.

 

Some people will move through the change curve very quickly, others will dwell in certain parts longer depending on the change and how it impacts them.

It’s natural to feel confused, or even disbelief when you are denied finance – the key is to get through the emotions that will prevent you from moving forward.

Get angry?

Getting angry at your bank or the broker when your finance application is rejected may feel natural or even justified, but listening to them to understand what has contributed to the decline is important.

The finance industry is in constant change, in Australia with the onset of the Banking Royal Commission huge changes occurred that put responsible lending criteria at the forefront to attempt to ensure that people who could afford to repay a loan with no adverse effects on their credit file got the loan they were seeking.  The general public welcomed the Banking Royal Commission, but aren’t as happy with the changes that have occurred from the investigation.  COVID-19 brought in another series of challenges with uncertainty with employment.  All of these factors come into play now and with this changing landscape, the rules around finance have changed.

Getting to “DECISION”

Through the anger and depression phases of change, some people will continue to apply for finance.  The old saying “doing the same thing over and over and expecting a different result is the definition of insanity” is true!  If you think of lenders in this regard

Prime lenders:  Those who offer great interest rates and terms

These are the hardest to get approved through. They want LOW risk clients who they know will pay on time and in full.

Sub Prime lenders:  Those lenders who have higher interests rates and more restrictive terms

These lenders offer loans to riskier clients and charge a premium (in fees and rates). 

The goal should always be to get a loan with a prime lender as the loan will be cheaper. Some people will move from a rejection from the prime lender to begin to apply for loans with Subprime lenders.   Their goal is to be accepted and to rid themselves of the feeling of rejection along with still wanting the item they were applying for.  We all know how it feels when we are approved for a loan – we feel worthwhile and a functioning member of society – the opposite feelings can emerge when we are declined.  Remember, being rejected/declined is hard, but keeping your head during this time is so important.  Each time you apply for a loan, you end up with an inquiry on your credit file.  We have witnessed files with 30+ applications in as little as a month. The more you apply in short periods of time, the worse your credit score (risk profile) becomes.

How to get to DECISION

If you have already applied and been declined, the first step is to ask why you were declined.  Some lenders will say “Your profile doesn’t meet our credit policy”.  That’s all they’ll say.  It’s a good idea to ask for their credit policy as most lenders will have a document that outlines all the tick boxes they require to lend.

Example:

• Employed full time or more than 20 hours per week
• Employed more than 12 months in the role (or show continuity)
• No defaults or late payments
• Stable residential history
• Stable employment history

Once you understand what the policy is, then you can work on the tick boxes that potentially have an “X” against it.   It may take time, but it is worth it.

Getting to the DECISION stage can be hard.  It means not taking the decline personally.  You may think you are a perfect candidate for a loan, but the lender is a business, they aren’t obligated to lend you money.  Their policies are designed to protect their business, their employees and shareholders.  If every bank just lends money to anyone, you can imagine how our society would be.

Getting to the DECISION phase is about understanding what’s in your control and what is not, then taking action to make the changes required.

Defaults or poor conduct on loans

One of the biggest reasons for finance declines is poor repayment history on loans.  Your credit file now records both negative and positive events.  Negative events can be defaults, late payments or bankruptcies.   What is not understood is the type of loan you are applying for can also negatively affect you.  PayDay loans that you see advertised on TV demonstrate to prime lenders (lenders who offer really low interest rates) that the applicant is a potential risk.   It may seem innocent to take a small loan out, but considering how this will affect the ‘snapshot’ you present to another lender is important.  If you’ve been declined by a prime lender, sometimes the only option is to go through a non prime lender, but fixing the issues on your file should be the first consideration. It may take longer and you may need to be patient, but it is worth it.  If circumstances dictate that you have to have the loan now, you may have to accept that you will only be eligible through those non Prime lenders, meaning you are going to pay a premium.

Banking conduct

Most lenders now want to see your bank statements.  In the past, you would download them and send them through to the lender, but now, this is all done electronically.  The financier will request your bank statements and if you want to get the loan, you need to provide them access.

Why do they do this?  In our experience, people either grossly under or over estimate their living expenses.  Calculating living expenses is really important to a lender as it shows whether you have surplus funds to be able to pay the loan back.  Just saying that you will isn’t enough, the lender wants evidence that you can – hence the request for bank statements.

What is shown in these reports?

Lenders will see your daily habits of spending, your regular income as standard.  They will also see how much you spend on things like

• Take away food
• Eating out
• Gambling
• Alcohol
• Payday loans (or short term loans)
• Fines
• Loan repayments
• Cash withdrawals (locations including pubs/clubs/gambling locations)

If you have left out items in your application or underestimated (accidentally or purposefully) there will be no hiding it.  Lenders usually want 90 days of bank statements, so before you apply for a loan, it’s a good idea to sit down with your own bank statements and see exactly what you are spending and on what.  If you find that you don’t have good conduct, spend 3 months fixing this.  What you will find is that when you tighten your budget, your finances can take a miraculous 180 degree turn and hopefully, not only will you be more in control of your finances, but you will demonstrate clean banking conduct.

Stable employment

For someone who has just got a job, the first thing they want to do is improve their lives. A new outfit, a new car or even a new home.  Lenders will look favourably on someone who has been in stable employment for a period of time or demonstrate if they have left an old job, that they have moved for a good reason. (eg. More money, career progression).

If an applicant changes jobs every 3 months, it can demonstrate risk.  The lender doesn’t know you or you circumstance and can’t be expected to delve into those depths.  Bottom line, if you’ve been in a job for 3 months and have a 6 month probation, it may be best to wait until your probationary period is over as employers can move you on during that period and lenders know this.

Champagne on a beer budget

If you have an income of $45,000 per year and you are applying for a loan of $50,000 you may need to adjust your appetite!  There is no hard and fast rule around this, but lenders have a formula that looks at what the average living expenses are for a single, coupled, and dependent family and calculate this themselves, regardless of what you have told them you actually spend.  This is part of responsible lending.  So, if you take home $1,000 per week, your living expenses are calculated at $700 including all costs, which means you have $300 leftover.  This is called the income-to-expenses ratio.  This ratio is important as the lender will look for a buffer in case things go wrong and will include the repayment on the loan.  If you are wanting to borrow too much, this will reduce the ratio to the point of a decline or the lender may impose a maximum lend.  (the most they are prepared to lend out)

Getting finance pre-approved and working with your broker on this will mean you are not disappointed if you had your heart set on a certain amount.  Adjusting your expectations can invoke the change curve again – but, over time you will see it was probably the best thing that could have happened.

Financial counsellors

If your finances are not in check, it may be time to seek help.  There are free financial counsellors who can help with budgeting and set you on a good path.  It may be surprising to you, but according to MoneyMag  86% of Australians do not know their monthly expenses.  Putting it down on paper with a professional and beginning the process of putting your money in order can be an amazing first step.  Use our easy tool to calculate how much you are actually spending verses your income.

Final thoughts

When applying for finances, it shouldn’t be a ‘suck and see’.  Working with a good broker means they will assess your situation and advise the best place to put the loan.. if at all.  Good brokers have access to numerous lenders and most will not put a hit on your credit file during this process until you are ready to apply and have all your ducks in a row.

It’s really important during this process to tell the whole truth, nothing but the truth.  A good broker is not going to judge you, they are trying to help you navigate the process.  If you are declined, ask why.  If a solid answer isn’t given, then it’s up to you to take steps to understand yourself.  Getting access to your credit file will be a really good first step.  If there are issues on that file, you can seek to have them corrected.  If your score is low, then working to fix it over time will mean that you are on a good path to good credit.

 

Disclaimer: The thoughts and opinions conveyed on this website are those of the author/s and are of a general nature. Any information provided does not constitute financial or general advice to you from Journey Finance Australia. When considering financial or insurance products, you should seek your own independent advice from a professional.

Get In Touch

1800 861 009

Locations

Melbourne

Brisbane

Sydney

Sunshine Coast

Townsville

Email

[email protected]

How do credit scores work?

Borrowing money to buy things like houses and cars means you are taking on significant debt to acquire items for your life.

For the initiated, when you take a loan out for an asset, the lender adds interest to the loan which is an amount above the amount you borrowed as a fee for lending the money.

It’s like borrowing a car with half a tank of fuel, when you return it, you will fill the tank up.

Lenders of money such as banks, building societies, credit unions or non-traditional lenders take on risk to extend the loan to you.  The risks could include:

• You may pay the loan back late
• You may default on the repayments (not pay at all)
• Your circumstances may change
• You may lose your job or ability to pay
• The market conditions may change

How are interest rates determined?

Without getting into too technical an explanation, the ‘cash rate’ is set by the Reserve Bank of Australia.  They meet each month and their role is to assist the overall economy to provide the growth needed to make everyday Australians lives better.

The Reserve Bank doesn’t lend money to you and me, nor does it have branches or ATMs, but the Reserve Bank looks at what is happening in the economy and adjusts ‘monetary policy’ in accordance with those things.

For example, if inflation is too high (prices are going up too fast or not at pace with wages) the Reserve Bank will adjust up the Cash Rate (% it lends money to banks) to slow our spending. (we spend more on mortgage repayments)

Alternatively, if inflation is too low it usually means there is not enough spending going on, so interest rates are lowered in order to stimulate spending in the general economy

There are many factors that determine the Cash Rate

• Unemployment rate
• Inflation
• Wage growth
• The Australian dollar (value against other currencies around the world)
• Australian household debt
• The Consumer Confidence Index

The RBA meets each month to look at a target of inflation of around 2-3%.  They will look at everything from what a litre of milk costs to the price of petrol to see what is happening in the economy broadly.  It then sets that months monetary policy accordingly (as talked about above)

In the 1980’s, Australia’s banking industry was deregulated meaning the government has less control and the market began to manage itself.  In theory, this creates competition and drives up the quality of service delivered as well as innovation. The RBA was no longer government-controlled and acts independently of the Government.

What has this got to do with credit scores?

Now we know how interest rates are set, we can start to understand how those rates are then passed onto to us the consumer.

We’ve already talked about risk.  This is a big factor.

Think about it this way.  If you had $100 to lend out and you had 3 applicants.

 

Applicant 1: 

Has been in a job for 3 years full-time.  Has a mortgage they are up-to-date on payments and never missed a payment.  They have a car loan also up-to-date with excellent conduct on the loan.  They save every pay and don’t spend more than they earn.  They have an emergency credit card with a $1,000 limit.

Applicant 2:

Has been in a job for 1 year and is a renter with no assets, but some savings.  They have a car loan that they have been late on a couple of times over the past few years.  Has a credit card that has a $5,000 limit but a balance of $3,000.  They got a  payday loan 3 years ago due to a problem with their pay/bank account.

Applicant 3:

Has been in their job for 6 months and lives in a share house.  They have multiple loans with a few lenders.  They have applied for a car loan 3 times in the past 6 months and been knocked back. They had a car loan 4 years ago that they defaulted payment on, but caught up the payments before the car was repossessed.  They are constantly late with payments on their existing credit commitments.

Which applicant would you be most comfortable lending your $100 to?

Most people would rank them in the order in which they have been put above. Some would not lend to Applicant 3 at all because there is a history and risk of not being paid back. 

Second consideration – what interest rate would you offer to each of the applicants if you were going to lend to them?  

•  Would you expect a higher payback from the higher risk applicant?
• Who would you be competing against for Applicant 1?  What if they offered a lower rate than you?
• What would be the easiest way to see each applicants risk profile to determine the rate?

Credit Scores

Without every bank knowing each person’s personal circumstance, we have what is known as credit scores in Australia.  This score is based on personal and financial information about you that is kept in your credit report.  (this is freely available to you).

How your score is calculated

As mentioned, what is in your credit report determines your credit score calculation.

• How much money you have borrowed
• The number of credit applications you have made
• Whether you pay on time (or at all)

The score is a scale between zero and either 1,000 or 1,200.  The higher the score, the more ‘credit worthy’ you are seen to be.

The actual score then helps the lender work out how risky it is for them to lend you money if they decide to at all, and what interest rate would be offered based on the five-point scale (excellent, very good, good, average, and below-average)

A low credit score could actually affect your ability to get a loan at all.

Knowing your credit score can help you get a better deal with finance, especially if it is a high score!

Setting the rate

With the 3 applicants above, most likely Applicant 1 knows their credit score and the lender will provide the funds at a lower rate than Applicant 2 or 3.  This is not discrimination, this is about risk. The lender is within their rights to determine the risk and to offer a product/service accordingly. When I talked about the market regulating itself, this is what we are talking about.  A person with a good credit score isn’t going to just accept a higher rate, they are going to demand the market adjusts to them.

The higher risk applicant due to their conduct on loans, or the way they have handled money, is going to have less choice and most likely pay more.  The market will determine what the higher risk applicant can have, until the day that the high risk becomes a lower risk, this is how the money market works.

Lenders lend based on risk.  After all, it’s their money.  Just like you wouldn’t risk losing your $100 by lending to someone where there was a good chance they wouldn’t pay you back, lenders base their decisions on risk profiles and act accordingly.

See also: Finance Pre-approvals

My credit score is low – how do I fix it?

 

STOP applying!

One of the most common mistakes we see potential borrowers make is multiple applications.  They will get knocked back with one lender and then go to more lenders.

Each time you make an application, it can drive down your credit score.  If your score is already low, it may come to a point that you are completely undesirable to any lender, no matter the interest rate.  Take a breath and understand that the lending criteria that has been applied to your circumstance is designed to ensure that you aren’t over extending yourself. This could be from the serviceability of the loan through to the loan to value ratio of the item you are wanting.

It’s tough to accept, but now may not be the right time!

Pay on time

If you want to improve your file, pay your bills on time!  If you can’t pay on time due to a particular circumstance, make sure you are ahead of the game and contacting the lender to make an arrangement. This includes phone bills and utility bills as these are the most common items that people default on – affecting the ability to borrow for things that matter like cars and houses.

Stick to your budget

Don’t over borrow!  Know your budget, stick to it.  Yes, it may be nice to have new shiny things, but if you determine a budget that allows you to save for those items – the future will be brighter for your when it comes to borrowing for assets like homes.

Stay away from pay-day lenders

There are SO MANY lenders in the market place that seem to be offering “Cash in a hurry” or “Access your pay before pay day”, with images of broken fridges or scenarios of the unexpected.

Pay day lending can destroy your credit score in a flash.  A main stream lender will see pay-day loans (especially multiple loans) and determine that you do not save for the unexpected, you don’t stick to a budget and you are a high risk.

What about Buy Now – Pay Later

The basic difference between a buy-now-pay-later lender like Afterpay, Zip-Pay etc is simply that you are paying fees instead of interest. It seems great. Get what you want now, pay later!  Laybuy without the agonising wait.

If you miss a payment, you are charged. If you default, you will end up with a negative mark on your credit history. It also won’t show on your credit file that you pay ontime, so it won’t positively affect your credit score.

Some BNPL services also do a credit check meaning you will have an enquiry on your file. (check with the service to see if they do)   As with the above point, stick to a budget, be disciplined with payments and work out what is more important for your future.

 

Final word

 

The finance market is a competitive place.  If you have a low credit score, you may think it is unfair.  Circumstances in your life have led you to having this score, but with any rating, you have the ability to fix it.  It takes discipline and determination.  There are many professional financial counselling services that can help you set a budget and even assist you in understanding how you can reach you financial goals.  It will be a journey, but it always starts with a step.

 

Disclaimer: The thoughts and opinions conveyed on this website are those of the author/s and are of a general nature. Any information provided does not constitute financial or general advice to you from Journey Finance Australia. When considering financial or insurance products, you should seek your own independent advice from a professional.

 

Get In Touch

1800 861 009

Locations

Melbourne

Brisbane

Sydney

Sunshine Coast

Townsville

 

Email

[email protected]

Hours

Mon:10am – 5pm
Tue: 9am – 5pm
Wed: 9am – 5pm
Thur: 9am – 5pm
Fri: 9am – 3pm
Sat: 8am – 1pm
Sun: Closed