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.