Financial self health check – say that 10 times fast
You want to put your best foot forward when applying for any loan, but this can be difficult to do when you’re not sure what lenders are looking for and what your real financial situation is. A timely assessment of financial capabilities helps save your money and property. The desire to gain monetary stability should not lead to unjustified risks and bad loans. Let’s figure out how to achieve harmony in your own finances before applying for a loan.
What’s a Bank actually looking for?
A bank will assess the following three criteria:
1. Serviceability. Based on your current financial position and proposed debt obligations, are you able to meet the proposed repayments? Essentially, this means that a bank wants evidence that your income is greater than your mandatory expenses (rent, food, bills, credit cards, etc..).
2. Credit history. In general, you should maintain a credit score of 600 and above to appeal to lenders. Equifax credit reporting is a key resource to check this.
3. Securities or collateral. Depending on the type of loan, the bank will require some type of security. If you are buying a home, the property will generally be your security through the form of a mortgage agreement.
Alternatively, collateral can be used. Collateral is something of significant value that the bank holds onto through a contractual agreement in case you are unable to meet your repayments. Loans that make use of collateral are called ‘secured loans,’ whilst those without are called ‘unsecured loans.’ Secured loans usually implement lower interest rates.
Income Analysis
Sources of income can vary immensely person to person, including: full time work (consistent wages inclusive of any bonuses), seasonal or part time work, sporadic odd jobs, or lump sums (inheritance, the sale of a property, a repayment of a loan by family or friends, etc..).
A budget can be:
1. In a deficit. This means a person is lacking funds to meet their spending obligations 100%, and will not be able to to finance a loan.
2. In balance. This indicates a borderline state, where their spending obligations are just being met, but could easily sway into a deficit or surplus.
3. In surplus. Having a surplus budget indicates that repayments can be met on all financial obligations. It also allows for spontaneous spending or the building of savings.
Living expenses assessment
A lender will want a family or individual to categorize their expenses into two main categories; Mandatory & Discretionary. The reason for this is so the lender can assess an applicant's liabilities based on their mandatory living commitments. So, the cost of buying a minimum set of food items is mandatory, but ordering Dom Perignon at your high school reunion is not.
Unnecessary spending
Cutting down on unnecessary spending is the easiest method to get a few extra dollars in your wallet. But cutting costs should be approached wisely. Spending habits can be tough to break, so moderating lifestyle choices can be a more effective method than cutting out expenses cold turkey.
Liabilities on loans and borrowings
A separate category of expenses is liabilities on loans and borrowings, including credit cards & zip pay. This is the most difficult type of spending to cut down on because it requires constant management. You may need to seek out help from a financial advisor or mortgage broker, who can assist you with things like debt consolidation and credit score improvement.
