So, we’ve talked about Credit Rating and Character in relation to loan approval. The next thing to discuss is right up there when it comes to getting your loan approved and that’s your Capacity to repay the debt.
The bottom line when we’re giving credit ourselves, whether we’re lending to a friend or family member as individuals or to a customer as a business owner, we want to know that we’re going to get that money back.
In relation to lenders, what most people overlook, is that they’re in the BUSINESS of lending money, so, not only do they want to get the money back, they also need to make a profit because they’re a business and not a charity.
When making a decision to lend money, there are levels of risk and the level of risk is reflected in the rate of return … which are the costs of getting into and maintaining the loan along with its interest rate.
In this post we’re going to consider how that plays out if you’re employed by someone else.
Best Case Scenario
If you’ve got a permanent full-time job and you’re out of your probation period, then you’re most likely to be in the least risk category for a lender depending on your Credit File and the other factors lenders take into consideration.
If your income includes Bonuses and Commissions or shifts and allowances and we can show consistency for a couple financial years, then that’s an added bonus (pun intended).
If you’ve got a good deposit and / or have property with good equity, then that’s even better.
Pretty Good Scenario
You’re casual or a contractor and you’ve been in your current industry and preferably with the same employer for a good couple of years and we can prove consistency of income over that couple of years, then that’s a good thing too.
Again, if you’ve got a good deposit and / or have property with good equity, then that’s even better.
Worst Case Scenario
You’ve got the income, but life has thrown you some curve balls and you’ve got some black marks on your Credit File and a low credit score, then we’ve got some work to do.
There are lenders that do understand that ‘life happens’, however if this is you, you need to understand that depending on the black marks and your actual credit score, the costs to get into a loan and the interest rate isn’t going to be as kind as if you had a ‘clean’ credit report and a good credit score.
In these circumstances, this is where the numbers and the goals need to be reviewed as part of the decision-making process.
Bottom-Line
Showing regular income is the first part of showing your capacity to meet the repayments of the loan your applying for.
Lenders also consider your total debt ratio, or what percentage of your income you’ll spend on repaying this loan plus any other debts you and your family have, along with the other costs you have in your life.
You can’t borrow so much money, that all your income is dedicated to repaying debts and costs and there’s no money left to live on.
If you want a loan, you’ve got to be able to show a lender that you’ve got the capacity to repay both it and the costs and interest of that loan and live without undue hardship.
Summary
As you can see, there’s a lot to think about BEFORE you make your application to a lender for money.
If you’re looking for money and need a hand to work out where and how to apply, then we invite you to Book a Time to Chat with Leanne.
