Sunshine Coast Hinterland Times

‘To do this, you need to understand what a lender looks for!’

Lenders look at a combination of factors in analysing a loan application, which can be simply classified under the term ‘5 C’s of Credit’. Set out below are some brief descriptions of the ‘5 C’s of Credit’ to assist potential applicant/s consider and/or prepare a loan application.

1) Character: A lender will look at the stability of the applicant/s for both residence and employment, as a more stable person is more likely to repay their loan. Stability of residence is more relevant for unsecured personal loans and loans secured by motor vehicles. A lender is looking for honesty and will cross check all the applicable information provided in the application as well as the supporting information and subject to any anomalies and their relevance to assess the risk may cause the loan to be declined. The lender will also obtain a copy of your Credit File, which lists everyone’s credit enquiries made against the applicant/s including guarantees given. Also recorded are any credit defaults (paid & unpaid), bankruptcy act information, court judgements and directorships, personal details such as date of birth, license number, address & changes, employer etc. You can request a copy of your credit file on www.mycreditfile.com.au. Ensure a loan application is completed accurately.

2) Capacity: The lender will assess whether the applicant/s can afford to repay the loan, in most cases using a calculation that assesses the applicant/s Net Disposable Income (NDI). An applicant’s NDI is calculated by deducting from the applicant’s after tax income their current and proposed financial commitments (including a stress test margin of around 2.00% on top of the proposed and/or existing loans to ensure the loan can be repaid if interest rates rise) and the lender’s estimate of the applicant/s living expenses (in line with Australian Bureau of Statistics cost of living calculations). The NDI (after tax and assessed living costs) must be in surplus and above the lenders ‘confidential’ policy amount).

Savings statements are scrutinized to establish a savings pattern as opposed to lump sum savings, and loan statements will be viewed for dishonour fees and/or late payments to establish loan conduct/affordability and credit cards over limit. Too many credit cards may affect a loan application as the whole credit limit is assessed even if un-drawn as applicant/s can draw this credit at any time.

Income needs to be able to be validated, regular and certain, therefore main income from employment, normally minimum 12 months with same employer unless changed to a job in the same industry (can’t be on probation) and/or self employed for at least 2 years, exceptions can apply, investment income, some social security payments etc. The lender can’t put applicant/s into financial hardship.

3) Capital: This is an applicant/s net worth (assets less liabilities), which demonstrates a capacity to save and build wealth. Lenders’ look at the net worth of the applicant/s based on the length of time they should have been generating an income. Therefore explanations may need to be given if the applicant/s net worth position is too low for their time they were eligible to earn income, which could be due to relationship separations, being new to Australia, failed business and/or bankruptcy etc.

4) Collateral: This is the security being purchased and/or other available securities that can be used to cross collateralize the proposed loan. The security is assessed firstly by a loan-to-valuation-ratio (LVR), and then the security is valued by the lender’s valuer and/or valuation method, mostly conducted by a registered valuer (property), and not based on the owner’s valuation. The lenders’ LVR limits depend on the type of security offered. The higher the loan size and/or LVR the higher the lending risk.

5) Conditions: This relates to economic conditions, employment and/or self employment industry risks as well as the lender’s policy against these estimated risks.

BUNYA HOUSE,

28 Maple St, Maleny

(AFSL 246921)

Ph: 07 5499 8988

www.malenycu.com.au