Have you recently purchased a car, boat or business equipment; only to find you have then been declined finance by your Lender? Since the introduction of the NCCP Act (2009) and the associated Responsible Lending Obligations; the lending landscape has changed significantly. These obligations were introduced to protect you against predatory and unscrupulous lending practices which were rife prior to the GFC.
Here are just some of the changes that have occurred:
More comprehensive servicing checks by Lenders to ensure you can afford the loan. Repayment buffers have been applied to larger debts such as home loans, business loans and investment loans. And credit cards are now assessed at 3.8% of their limit regardless of whether you use them or not.
Living expenses have become a focal point too. Being able to determine what you spend each month on living and discretionary items. is an important part of the assessment of a regulated loan.
Credit Scoring has been introduced and there is an increased reliance on this, by Lenders.
Loan pricing has been structured to reflect rate for risk. It is no longer a one-size-fits-all approach. For example, older vehicles generally attract higher interest rates, compared to newer vehicles. Property owners are likely to get lower rates than non-property owners.
All these changes were necessary and for the benefit of the borrower, but it has created a lending landscape whereby more diligence is required prior to submitting an application to a Lender.
This brings us to the point – are pre-approvals necessary? We will cover off some of the pros and cons.
What is a Pre-Approval?
A loan pre-approval means that a lender has agreed, in principle to approve your loan. Although not a formal approval, it is as close as you can get to it without having purchased an asset (boat, car or alike). The lender assessment has been conducted and checks such as credit scoring, income and servicing have been completed by the Lender. This will provide you with some peace of mind, and the comfort to go shopping knowing your loan is likely to be approved. .
Applying for a pre-approval ensures most of the lender checks are completed. These include credit checks, employment income & servicing checks and verification of assets. This will help speed up the process when you find the asset you wish to purchase.
A Lender will allocate a credit score to your profile when the loan is submitted for pre-approval. This credit score can influence the interest rate and the outcome of the loan application. By performing this check upfront, it provides you with more certainty about the interest rate and the repayments on the loan. If you have had previous credit problems then we can address them at this stage, and work with the Lenders to ensure the best outcome for you.
Peace of Mind
Having your heart set on a new car, boat or similar; only to be told that you have been declined for finance, is not a pleasant feeling. To avoid this situation a pre-approval is important. With many of the lenders checks completed and more clarity around the interest rate and repayments, it will lead to a pleasant purchase experience.
Searching for the best product for you, preparing the application paperwork and applying for a loan can take some time. Applying for pre-approval before you buy, is a great way to save the time involved in this process. All of the legwork is completed, so you can enjoy the experience of searching for your new purchase. And when you have made the decision to buy, we can get you driving it sooner.
Negotiate a better deal
If you have been pre-approved, it may help you to drive a better deal with the Dealer or Vendor. They may feel more comfortable selling it to you if you have already been pre-qualified by the Lender.
Applying for pre-approval will require a check on your credit file, which will be lodged as an enquiry. Too many enquiries can affect your overall credit score. It is a good idea to have some sense of what you are buying, so we can apply through the best lender upfront. If you do not proceed with the purchase, then that enquiry will remain on your credit file.
Change your mind
If you change your mind on the type of asset you are purchasing, then it may affect the pre-approval. For example, if you were originally considering the purchase of a new car but decide to buy a 7-year-old car, the Lender may increase the interest rate or not approve the loan. It is important to have a good idea of what you are buying when you apply for pre-approval. It can affect the lender of choice, and the product you are applying for.
Change of circumstances
A pre-approval is assessed on the information you have provided to the Lender. If your circumstances change then we must notify the Lender and this may affect the outcome of the pre-approval. For example, in the time you have received your pre-approval and purchasing the (car), you change employment and your income has reduced. We must notify the lender of these changes and it may affect the pre-approval.
If you are looking to make a purchase speak to our team about the options you have available and we can help guide you through the pre-approval process.
The information is intended to be of a general nature only. We do not accept any legal responsibility for any loss incurred as a result of reliance upon it – please make your own enquiries.
Any advice contained in this document has been prepared without taking into account your particular objectives, financial situation or needs. For that reason, before acting on the advice, you should consider the appropriateness of the advice having regard to your own objectives, financial situation and needs.