New rules make it harder to get an online loan
A growing number of stories have emerged recently about New Zealanders being denied home loans for trivial reasons. But what about online loans? Surely if you need an online loan for just $3,000 you won’t be subject to the same forensic analysis of your bank statements?
How do the new credit laws affect people’s ability to obtain a loan?
Recent examples of people who have been turned down for loans in NZ include someone who spent $187 on Christmas presents at Kmart, purchased one lotto ticket in three months, spent money on Netflix, and ate takeout twice a week. It’s not so easy to apply for a loan today.
Some applicants who qualified for a home loan before the new laws took effect on the 1st of December are no longer eligible. Simple loan top-ups are also no longer available. A full income and expense assessment is required even if you just want $5000 to build a deck for the summer. No matter how much equity you have in your home or how well you have kept up with loan payments, if you do not pass the affordability test, you are likely to be turned down. Mortgage Advisors have slammed the new lending changes, with one advisor saying potential borrowers were being treated as “imbeciles” who could not manage their own affairs. Regardless, loan companies can face heavy fines if they fail to comply with the new rules, so they’re being cautious when they approve new loans.
But do the new rules apply to people wanting small online loans?
What online loans are easy to get approved for?
Surely if you want to apply for a $1,000 cash loan for car repairs you will not be subject to the same kind of forensic analysis of your bank account? The short answer is ‘yes, you will’.
It is the lender’s responsibility to evaluate your income and relevant expenses. Online loan companies need to be confident that the anticipated income will exceed the anticipated expenses, and that sufficient buffers or surpluses have been estimated. You can learn more about how loans are assessed for suitability by visiting the Commerce Commission website.
The threshold of “having sufficient buffers or surplus” is really important. Spending nearly all the money you earn now means you don’t have a buffer. Even if you earn enough to cover your current expenses and your new loan repayments, that still may not be deemed ‘sufficient’. What is deemed sufficient is somewhat subjective, but the lender needs to prove that in the event you are hit with unforeseen expenses you are not in a vulnerable position.
To verify the expenses, lenders may use bank statements. In all cases, the lender must consider whether the relevant expenses are a reasonable reflection of the borrower’s circumstances. For example, if you spend considerably less on groceries than the average for a family of your size, that may trigger alarm bells. Is that amount a ‘reasonable reflection’?
Online loans already needed to be affordable, right?
Yes, but not to this level of scrutiny. Loan companies can no longer use a formula that says if you earn $50,000, you’ll spend 80 percent on living expenses, or if you earn $200,000, you’ll spend 40 per cent. Instead, they need to review your bank statements and look at all outgoings.
The revised legislation says outgoings include accommodation costs, insurance, rates, body corporate fees, school fees, and child support that is payable under the Child Support Act, debt payments, utilities, food and groceries, clothing and personal care, child care, medical expenses, transport expenses, other frequently recurring outgoings such as savings, investments, gym memberships, entertainment costs or tithing.
Who is eligible for a online loan?
To qualify for a loan, you must show that you are financially responsible. It is important to understand each line of your bank statement on where your money goes every week, month, and year.
- Analyze your bank statements first. Group all of your expenses into each of the categories above. What categories could you save money on?
- Set aside a portion of your income in a savings account, ensure this amount is sufficient to service a loan plus some.
- Don’t put purchases on afterpay, as it is still considered debt
- Cancel any credit cards that are not in debt. The limit threshold is considered debt, even if you are in credit.
- Cancel subscriptions you don’t use. How often are you accessing each streaming service? Which ones could you do without? Are you really using that gym membership?
- Think about every single purchase before you make it. Is it a nice to have or a need to have?
- Practice good financial management for three months prior to applying for your loan.
When you apply for a loan, it’s important to note that your credit score will be affected. While applying for the odd personal loan won’t have much of an effect on your credit score, multiple loan applications and rejections in a short period of time will. This usually indicates that you are applying for more credit than you can repay and acting financially irresponsible. Set yourself up for success before applying, by following these seven steps.
These days, it’s harder to obtain a fast online loan since there’s more pressure on lenders to ensure that you’ll be able to repay them. The penalty for not following good due diligence on lenders is $600,000 for companies and $200,000 for individuals. Lenders have a lot to lose, so they are exercising more caution than ever before. You’ll have a greater chance of getting your loan approved if you maintain good financial control.