If you’ve ever been denied for a loan, you know it’s not fun.
There’s almost nothing worse than enduring the long interrogation, and wasting days of paperwork, only to miss out on your new car or dream home.
Unfortunately it’s a feeling most Aussies know too well, as getting approved for a loan has become harder than ever. The preparation alone feels like a marathon, with so much paperwork and calculation involved. Lenders have also become a lot smarter and more demanding, making it tough to get your financial dreams on track.
But don’t leave it to chance or sympathy. There are things you can do to speed up the approval process and get your loan faster, giving you the financial freedom you deserve. Going in with a clean credit file is a no-brainer, but it’s only half the work.
Some basic preparation and strategic planning goes a long way to increasing your borrowing potential, and your credit score. So here are four things you can do right now to prepare for your next loan application. Make sure you check these off before you apply.
Have an existing credit default or blackmark? These won’t work. Talk to us about getting it removed before you apply.
#1: Cut Back On Applications
Knowing when to walk away is the first and easiest step towards improving your credit score and getting approved for a loan. That’s because the more applications you have, the higher your risk of being denied. The best way forward is to simply stop applying for credit all together.
Banks and other lenders will check your credit history when you apply for a loan, so they can see all the applications you’ve made in the last 5 years; everything from your credit cards, car leasing, and even telecommunication plans. That means they know how much you already owe or plan to borrow, as well as how often you top up on borrowed money.
Whether your past applications were approved or not, a long borrowing history is never a good sign. It may show to lenders that you’re prone to impulsive spending and poor budgeting, which is a huge red flag. That doesn’t mean you can’t have any existing loans when you apply for a new form of credit. In fact, it’s beneficial to show that you’ve made repayments on previous loans in the past. But there’s a fine line before you start to look credit hungry.
Thankfully the solution is simple; limit how many times you apply for credit, and your borrowing potential will improve over time. Here’s the most common borrowing mistakes that lead to excessive applications, and how to curb them.
- Don’t use loans for expensive luxuries. Stick to what you can afford instead of using loans to fund unnecessary commodities. Do you really need a new car or laptop every couple of years? Probably not. Use borrowed money for legitimate purposes only, like investing, starting a business, or buying practical things you need.
- Shop around before applying. Make sure you find the best loan before you apply. Cancelling an application because you found another loan with better terms will just increases the number of listings on your credit file. So do your research first before committing to anything.
- Don’t get forced into applying. If you’re discussing loan options with different lenders or your bank, don’t get sold into applying prematurely. Loan officers are trained to move you through the shopping process and get you to apply on the spot, so stand your ground and let them know you don’t want to apply straight away.
- Never re-apply out of frustration. This is probably the fastest way to put a huge dent in your credit file. Re-applying for more loans after you’ve already been rejected won’t help your chances, and it only makes things worse. Find out why you were denied and fix the problem before applying again (black-marks and credit defaults are the biggest culprit).
There’s no unanimous limit to follow here though. The threshold depends on other factors too, like your income, borrowing history, demographics and so on. But if you’re unsure, less is usually better.
#2: Show Lifestyle Stability
There’s a non-financial side to loan approvals too. Lenders also factor in personal demographics and lifestyle factors, like your age, marital status, residency, and so on. The key thing they look for is stability and reliability, as these play a key role in your ability to pay off debts.
In plain terms, that means you need to have your life sorted and make responsible choices. Here are the most common lifestyle traits you can work on to increase your chances of getting approved.
Due to anti-discrimination laws, you can’t be denied for a loan just because of your age. But lenders still have ‘life-stage restrictions’ on some of their products for practical reasons. For example, if you’re over 85, it’s unlikely that you’ll meet the approval criteria for a long-term mortgage, which is usually calculated as a 25-year repayment.
So the first step is to only apply for loans that have an appropriate time-frame for your age. Lenders will expect that you’ll be working for the life of the loan, so if you plan on retiring in the near future you’ll likely have to make larger repayments to pay off your loan faster.
If you’re already retired or living off a pension, it’s good to show that you still have financial commitments or other forms of income too. Just because you’re not working, don’t let lenders assume you’re not financially active. Even small, regular bills such as a monthly phone plan shows that you can still handle financial commitments.
If you’re younger (especially in the millennial bracket) your main priority should be to appear more mature and independent, especially if it’s your first loan. That means separating yourself (at least on paper) from your parents. Start with having your own documents like a separate bank account, Medicare card, and driver’s license. These will also help verify your identity.
The same goes for any assets you own, like a property or even a car. Make sure they’re registered in your name so you can use them as collateral. Holding a steady job and address should also be your priority. Lenders like to see stability and security, and there’s nothing worse than constantly changing cities or careers at a young age.
When it comes to your occupation, some job titles are obviously more loan-worthy than others. This is not the time to list yourself as a freelancer or entrepreneur as these have ambiguous meanings, and may be perceived as code for unemployed. Even though lenders will verify your employment with payment slips or tax records, polishing your job title and being specific about what you do makes the process a lot smoother. Are you the shift manager of the particular store you work at? Mention it in your job title. Perception and confidence goes a long way to getting your loan approved.
It should go without saying that having a steady, full-time job is also essential. If you’re working part-time or casual, try find something more stable and stick to it for a few months before applying. Note that working in certain industries can also raise your risk level. Volatile or rapidly declining sectors may not be considered stable employment, because the turnover rate is huge. The same goes for internships or contracting roles. Even if you’re on good wages, lenders will consider whether your job is likely to last over the life of your loan.
If you’re still searching for a reason to get married, then there’s the extra borrowing power that comes with it. Applying for a loan with your partner can make it a lot easier as both your incomes will be combined in the loan assessment, letting you borrow more than you could alone.
This also works for credit scores; if your credit rating is low, then your spouse’s credit rating can offset the risk. You’ll need to make sure you’re legally married to be considered for a dual-income consideration though.
If you want to apply for a loan in just your own name, then you’ll need to show you can support your spouse and children too. That means your individual income will need to be high. This may also apply if you’re separated, so getting your divorce finalized before you apply could be worth considering.
#3: Avoid Suspicious Transactions
What you do with your finances may not be as important as it used to be, but what you don’t do certainly is. Lenders are more hostile than ever towards suspicious fiscal activity such as cash-in-hand jobs, unregistered purchases or sales, gambling, or risky investments (like cryptocurrency). These are somewhere between illegal and financially irresponsible, so make sure your transaction history looks clear of them before you apply for a loan.
If you’re regularly making large withdrawals or deposits, it’s good to be able to prove what they’re for. Banks and other lenders will want to know where your money is going, and why it’s being moved so often. To them, if it looks suspicious, they’ll treat it as such.
Gambling is the biggest and most common pitfall to avoid here. Make sure you set a strict limit on how much you spend or just stop altogether. Banks can track where you’re doing your spending (such as casinos, or online betting sites) so the last thing you want is to be flagged as a high-risk gambler.
The good news is that suspicious transactions will roll off your account history over time, so the sooner you stop the sooner you can apply for a loan without it being noticed. We’d recommend waiting at least a few months before applying, and using your account for normal everyday purposes for as long as you can in that time.
#4: Keep An Eye On Your Online Activity
If global trends are anything to go by, your online presence could start to play a big role in lending decisions and credit scoring. This has already begun in the US and could follow in Australia too, so it’s worth considering for the future, especially if you plan on borrowing long-term.
If you have a Google or Facebook profile, your data is already being used to drive ads and profile you. That’s nothing new. It’s the price you pay for any ‘free’ platform (welcome to the internet). Even though there are stipulations on how personal data can be used, you still need to watch what you share. You’d be surprised at what’s hidden in the terms and conditions.
Things like your browsing history, search terms, and Facebook posts can be integrated when you visit a new website, letting the host know who you are and how you behave. When applying for certain services online (especially buy-now-pay-later schemes), this data can also be used to calculate your credit risk. Many major companies like Mastercard and Ali Baba already rely on big data to drive lending decisions for their online services, which accounts for the growth of data agencies like Big Data Scoring.
For now, this practice is mostly limited to independent websites and services, but it’s definitely got momentum to be picked up by major lenders too. Car insurers in the US have already trialled using Facebook data to provide accurate quotes for their customers, so it’s a space worth watching.
The good news is that data protection laws are becoming tighter, and legal debates are continuing to force major companies away from the practice. If you’re worried about your online data, the best way is to simply avoid online services that use your online data.
Be wary of all the apps or websites you allow access too as well. If an online system asks you to sign in with Facebook or Google, or asks to access your device information, you can always decline. Or you can use a VPN tool such as TunnelBear to hide your IP address and browse anonymously.
It’s important to remember that every lender will have their own approval process, so this isn’t a comprehensive list of strategies by any measure. Some of these may not be applicable for certain lenders or loans, so your best bet is to talk to a financial broker about your specific circumstances if you’re still struggling to get approved.
None of these strategies can make up for a bad credit file either, so if you have a black mark or credit default then talk to us about getting it removed before you apply. We can check all credit files on the spot and usually find what’s holding you back instantly.