When you apply for a personal loan, every detail will be assessed, right down to your postcode.
That doesn’t mean you need to spend hours agonising over your application. Here’s what you should know before applying for a loan to hopefully help you get the stamp of approval.
1. Do you meet the eligibility criteria?
First thing’s first, to be eligible to apply for a personal loan you need to:
- Be 18 years or older
- Be a permanent Australian resident
- Currently be working and earning an annual gross income of more than $24,000
- Have no defaults on loans or credit cards in the last five years
- Not been declared bankrupt in the last seven years
2. What does your prior lending history say about you?
All lending history will be reviewed however unsecured loans, loans that don’t have anything held as collateral or security by the lender, will be of particular interest. Regular repayments will be considered favourably on personal loans or credit cards.
There’s no way around this – the best thing to do is always try to stay on top of your debts and repayments so you keep your credit history clean. You can also check your credit score for free to literally find out what your lending history says about you.
3. Can they bank on getting their money back from you?
Lenders determine how much of a risk you are to lend to by looking at your assets and liabilities. Get an idea of your net worth with this calculation:
Assets (anything you own) – liabilities (debts or payments you owe someone else) = Net worth
If your liabilities are higher than your assets, a responsible lender is unlikely to increase that liability with another debt.
When calculating your liabilities, make sure you only include your portion of a debt, e.g. if your home loan is shared with someone else, only list your share of the loan, not the whole amount. Don’t forget to include savings in your asset base, including any in a term deposit.
4. Are you stable?
Employment and address are two ways lenders check your stability. If you’re off probation, have been with your employer for more than three years and can show stability of residence for two years or more, you’ll be viewed favorably.
This isn’t realistic for everyone though, so there are things you can do:
Self-employed – show last year’s tax return or business activity statement as a benchmark of your annual earnings;
Commission salary – if your commission’s paid annually get a letter from your employer outlining what your expected salary and commission is;
Apprenticeship – if you’re nearing the end but will be kept on full-time, a letter from your employer will help.
Residential stability is more of a challenge if you still live with your parents or move often. It’s a big plus if you own your home or can show you’ve signed a lease for six to 12 months.
5. Can you afford the loan repayments?
A lender will want to know that you can comfortably afford the loan repayments, so they’ll assess your income and expenses to make sure you have what’s called ‘excess capacity’, which is when your income is higher than your expenses.
They will also want to see a buffer so that if you have unexpected life events, like a jump in bills or a baby comes along, it won’t put you under hardship. Lenders may also use industry benchmarks such as HPI (Henderson Poverty Index) and HEM (Household Expense Measurement) as a baseline when assessing your application.
Similarly to assets and liabilities, make sure you only list your expenses, such as your share of the rent or groceries, and not your whole households.
6. Your age and life stage can also have an influence
Your age, but more importantly what life stage you’re in, plays a part. If you’re 21, it’s not your age that’s the problem but that you’re unlikely to have built up residential or employment stability, a strong asset position or high income. Like lending history, there’s no way around this so just ensure you can satisfy the other factors mentioned above.
What do you need to have prepared when you do your application?
- Proof of ID
- Proof of address, e.g. utility statements, rental agreements, bank loans
- Payslips, tax returns and/or business activity statements
- Letter from your employer
- Rental agreements
- Bank account
Depending on what the loan’s for, if the full amount isn’t approved don’t reject a lesser amount immediately. A smaller loan could still help if you’re looking at debt consolidation.
If you got approved for a $10,000 personal loan, how would you use it – a well deserved holiday, to consolidate your debts, revamp the kitchen or does something else tickle your fancy? Let us know in the comments below.
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