What do Lenders Look for in a Borrower?? and the rise in Buy Now Pay Later Services
What do lenders look for in a borrower ??
This is a really good question and one that is not often easy to answer, mostly because different lenders can have very different approaches to how they view process and of course price applications for finance.
There are a few reasons for this……..
Specialisation. Not unlike any other industry, some banks have developed their own specialisations. In the case of a lender, or bank, this means they might do really well when working with people from a particular industry or profession. Generally, the better the specialisation the more flexibility in the approach to that particular type of borrower. For example, some lenders have specialised teams to work on loan applications from those in the Agriculture Sector. Such bankers live and breathe everything agri, can speak the language, and will have a much greater understanding of the risk associated with an agri loan application than your typical city banker.
Risk Appetite. This means that some banks might be more cautious when working with a particular type of industry or profession. This commonly occurs with applicants from the construction or property development industries. Sometimes a bank may feel they are a little “overweight” (or overexposed) to the construction sector, and sometimes even if only for a short period, will tighten their policies to slow down the number of construction or development applications coming to them.
On the Home Loan front this can also come down to the split in their Home Loan Book between Owner Occupied Loans and Investment Loans. Again, if a bank has had a massive run with Investment Home Loans, they may want to slow this growth down for a while via changes to their rate offerings – ie: dropping their Owner Occupied Home Loan rates whilst increasing their Investor Home Loan rates. Such changes will only be for a short to medium period, at least until the bank, or lender, feels they have a better balance in their loan book.
Regulatory Requirements. Some of the laws imposed on the banks can actually affect the way that they assess consumer lending as opposed to business lending – for the same borrower and using the exact same information. As silly as it sounds, it is not unusual for a self- employed applicant to have a Business Application approved but a Consumer Loan declined – using the exact same information.
All of the above are examples of where it pays to have an experienced broker help guide you to the lender best equipped to assess your application and your own particular circumstances.
That aside most lenders look to assess an application using what those in the finance industry call the three C’s – Character Capacity and Collateral.
Character involves the research and analysis of an applicant’s history, their track record, and above all their ability to continue earning income at their current level (or higher).
Capacity, as in a borrowers “capacity to service the debt”, is an assessment on the borrower’s capacity to generate or earn enough income to repay the debt within the agreed period. This is where the bank or lender will ask for and analyse such information as tax returns, financial statements etc.
Collateral, or as it’s more commonly called, security, is simply an assessment on how much security the bank will require for an application with the amount usually based on the strength of a borrower’s character and capacity.
For example if a borrower has a very strong track record, and has high incomes relative to the debt that they are seeking, a bank may actually accept and/or offer to take less security than would normally be the case.
Of course this same rationale can sometimes lead to a lender requiring more security than would normally be the case.
Now onto a hot topic of the moment, Buy Now Pay Later. This sector has well and truly won over the youth demographic of Australia. So much so the number of users has increased more than six-fold in the last 5 years.
We have even seen mainstream banks looking to join the club after seeing a decline in their own traditional offering, the credit card.
The current day BNPL process is pretty simple and very tempting. BNPL providers pay the
merchant on behalf of the customer thus allowing the customer to take the goods or services immediately while subsequently paying off the debt through instalments.
Pretty tempting right ??
As the massive growth in this sector continues mortgage professionals are warning users, particularly those in the younger demographic, to be very cautious of overdoing it as this could affect their chances of getting a home loan, or other types of consumer credit, further down the track.
It’s effectively the current day version of a lay-by – but in reverse. In theory it makes sense and it might be okay for someone who is disciplined, manages their money well, and can pay off the item on time. But that represents only a small percent of the people who are actually using the services with many often spending in excess of their means.
As a result there’s a growing stigma in the finance sector associated with BNPL and utilizing this payment method may unintentionally send the wrong message to a lender. If the lender sees BNPL services frequently appearing on an applicant’s bank statements it can often trigger more questions than answers about their spending habits and may ultimately mean that they choose to decline the application.
Lenders much prefer to see potential borrowers save for a purchase and demonstrate those good savings habits. Those same habits can usually also indicate an ability to repay a loan.
It’s important to appropriately manage your expenses well in advance of applying for a home loan that way you can show the bank that you can save and afford to service a mortgage when the time comes to do so. Frequent and overuse of buy now pay later Services can actually exhibit the opposite.