So, you’re planning something big and you’re pretty sure you’re going to need financial help. That’s great! It’s a fact of life that many of the big-picture purchases we make are done using home loans or personal loans. Whether you’re buying a house, doing renovations, or just looking for a new car or holiday, there are loans to suit every purpose.
But, if you’ve never taken out finance or have had difficulty making loan repayments before, there are some things you need to know, and some steps you can take to make yourself a more attractive candidate to lenders.
Firstly, you’ll want to reduce your income to debt ratio, calculate your loan amount, improve your credit score (if it needs improving), and establish a savings buffer.
Let’s explore these each in more detail.
How To Reduce Your Debt to Income Ratio?
When making a loan application, lenders will ask for a complete picture of your income to debt ratio. This is a measurement of how much income you regularly earn, compared against how much debt you are currently repaying. If the level of debt you are servicing is too high based on what you’re earning, there’s a high chance your loan won’t end up getting approved.
This is because different lenders have margins of risk within which they’ll lend money. If the lender considers your loan too high a risk of not being repaid, they are less likely to approve it.
So, before you apply for any loans, pay down as much debt as you can – your credit card, any existing loans, any store cards – the lot.
How To Calculate the Loan Amount?
Depending on your loan type, some form of deposit is necessary. For example, a baseline deposit for home loan borrowing to avoid having to pay Lender’s Mortgage Insurance (LMI) is 20% of the home purchase price, although guarantor loans can help borrowers get around having to pay LMI while having as little as 5% deposit.
For personal loans, it really depends on your lender and loan type. For example, at Greater Bank, with our New Car Loan and Secured Personal Loan, we allow borrowers to ask for up to 120% of the purchase price of their new car, caravan, boat or motorcycle.
How To Improve Your Credit Score?
You should head to any of the free online credit reporting sites and establish your baseline credit score. If you find that this needs improving, we’ve written at length on this before here.
In short, you should look to do all of the little things that will improve your credit score with time – pay your bills on time, make more than the minimum repayments on your debts, pay existing debts down as much as you can and avoid too many hard credit enquiries with multiple lenders.
The Importance of a Savings Buffer
In the lead-up to applying for your loan, it can be a good habit to start growing a bit of a savings buffer. Once you’ve calculated your full loan amount and your repayments, a starting point is to accumulate 3 months worth of loan repayments in savings.
When considering your application, your lender will be able to take this into consideration, as it shows responsibility as a borrower. Not to mention that if something unexpected occurs to interrupt your regular income stream, your buffer will give you an opportunity to look for work while still servicing your loan.
Types of Loans
Next, you’ll need to think about what type of loan you’re after.
For home loans, there are a number of options at your disposal. You can opt for a fixed rate loan, which lets you lock in an interest rate for a certain period of time. Or there’s a variable rate loan, which means your interest rate can be moved up and down in line with market fluctuations. Or you can even opt for a Line of Credit Loan, which gives you access to an approved amount, which you can take from as needed and make repayments on what you owe.
If it’s a personal loan you’re after, the two main types are secured and unsecured. A secured personal loan means you’ll need to offer something as security or collateral – usually this will be the thing you’re purchasing like a new car or boat. These types of loans will usually offer a lower interest rate, as security is provided. An unsecured personal loan doesn’t require any collateral, and as such, interest rates for these types of loans will usually be slightly higher.
The risk of taking out a loan
If you’re intending on being responsible as a borrower, there’s no reason you should have any issue continuing to make repayments. However, life happens, and there is risk involved when taking out a loan. The three main risks are:
Not being able to make repayments
This is the single biggest risk involved in taking out a loan. If you’re not able to continue to service your loan repayments, this may cause serious damage to your credit score and financial future.
This is why it’s super important to be careful when calculating your loan amount, and being sure that you’ve budgeted properly so you can meet each repayment.
Being honest and upfront with lenders about your debt to income ratio is also vital, as it will help to avoid sticky financial situations down the road.
Getting too deeply into debt
Although it may be tempting to borrow the maximum amount your borrowing power allows, you should seriously consider the amount of debt you’re comfortable taking on.
Ask yourself whether you feel that your chosen lender is acting responsibly in offering you more than your needed loan amount. And by getting into more debt now than is necessary, are you potentially putting your future financial goals at risk?
Affecting your ability to borrow in future
As we’ve mentioned, lenders look unfavourably on potential loan candidates whose debt to income ratio is too high.
So, before you take out your loan, ask yourself whether it is absolutely necessary. Taking out large loans, especially while you’re young, can have a serious impact on your financial future. You’d hate to turn around in ten years and find that you can’t get approved for a home loan because of your ravenous appetite for credit in your twenties.
Take Out A Home Loan or Personal Loan With Greater Bank today
At Greater Bank, we pride ourselves on being responsible lenders to the communities of NSW and South East QLD. We’ve been helping our customers turn their dreams into reality for over 75 years.
Whether you’re chasing a Home Loan or Personal Loan, our expert lenders will help you chart a course to a safe and secure repayment journey. Start a conversation with your local lender today.