Joel@dreamcatcherfinance.com
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Ever wonder why some lenders are adamant to see your bank statement with your finance application?
During 2020 it is clear that lenders have been requesting more documents to carry out their assessment on loan applications. One key document that has been continuously required are bank statements, making it a fundamental document required to reach a decision.
Within the last 3 months, over 90% of loan applications lodged by Dreamcatcher Finance required bank statements to be supplied for a decision to be reached on a loan application. The number do not lie – bank statements are increasing becoming a mandatory requirement. As they are deemed as present time documentation, they are often deemed as quite reliable to use for their decisioning.
With this in mind, knowing what a lender is likely to focus upon will provide better transparency for when you apply for any form of finance. For this article, we will limit our focus upon 3 key trends that have been most commonly brought up in recent months and why they are important for your finances and any prospective finance application in the future:
1. Inconsistent Income
2. Account Clearing
3. Dishonours for Existing Loans
Each of the above elements are mutually exclusive from one another. Neither are dependent of one another so if one of the above trends are negatively impacting your bank statements, this may lead to a decline in itself. A key rule of thumb to note about bank statements – once a lender has seen your statements they cannot unsee them. Therefore it is important to note if your bank statements are showing any of these potential trends.
1. Inconsistent Income
When requesting for bank statements, lenders generally require 3 months of latest bank statements. To determine affordability, your income level through all pay periods presented during the 3 month period is taken into consideration to obtain comfort that not only your income level is sufficient but there is consistency of income in each pay period to make ends meet in addition to the finance applied for.
Whilst there are instances some applicants may earn a king’s ransom during the high points, lenders do need to consider the possible low points as well. This may often require averaging out all pay periods within the 3 month period though this criteria may change depending on your individual circumstances.
Why Lenders Care About This
Verifying sufficient income is part of lender’s responsible lending obligations. Setting that aside, any gaps during any income pay period may indicate periods of inconsistency with income showing a lack of cash flow which may indicate instances where funds are unavailable to make repayments. A good example of this is where there are prolonged instances of insufficient income. This is likely to be problematic with verifying your income as your income source is deemed as too inconsistent for consideration.
At times there may be instances where dips of income can be mitigated. This commonly may be the case for causal income earners who are not entitled to annual or sick leave. In some instances, an employment reference (ie: making direct phone contact with your manager at work) can be conducted to cover off instances where dips of income are a once off incident. On the other hand, if your income dips significantly every second week this may be difficult for any lender to overlook due to the negative trend showing.
Example 1: Amod works as a causal employee as a bricklayer. On average over 3 months he earns a sufficient wage to confirm serviceability. However, his statements do show two weeks of reduced income. Amod advises his finance broker this is due to an injury during work which left him unable to attend on full time hours. An employment reference was conducted and Amod’s manager confirmed the details that were mentioned, further emphasising this was a one-off instance and that he is back to work as usual. The lender was satisfied with their findings and are able to rely on Amod’s average income level to approve his application.
2. Account Clearing
Account clearing is deemed as negative conduct. This is where income is flushed out of one’s bank account in full. This can be done via ATM withdrawals or transfers through to another account.
As the majority of lenders require their loan payments to be direct debited on an automatic basis, they need comfort that you have sufficient funds in your account at any given time. Instances where someone receives income and clears it out of their account on the same day is poorly looked upon and often leads to an automatic decline.
Why Lenders Care About This
If a lender is unable to verify whether cash will be available for direct debit, there is no comfort on their end that payments can be made. Remember that lenders requesting for bank statements will take the bank statement conduct to heart. If there are insufficient funds available in the majority of the 3 month statements, how can they be sure that your loan commitments can be made.
In addition, account clearing is frowned upon as lenders are unable to verify how monies are spent. Therefore it becomes unclear if there is truly enough income available to fund an applicant’s existing expenditure level since that is unaccounted for. This leaves lenders with insufficient information to properly make an assessment which will lead them to turn down an application as they are technically unable to complete a proper assessment (your expenditure is a key component of your financial application).
Example 2a: Brenda has built a distrust for banks over the years. As a result, she has gotten into a habit of visiting her nearest ATM on her payday to clear her account for funds. She applied for motor vehicle finance as her car has broken down and requires something more reliable. Once her bank statements were provided, her application was quickly declined due to the fortnightly instances of account clearing. Brenda has maintained her stubborn option about banks, blaming the lender that they are unable to help. This makes Brenda non-approveable unless she changes this habit.
There is one exemption to account clearing -where there is an exist loan commitment and that payments are made accordingly. At the very least this shows a willingness to make repayments on commitments which a lender will treat as a positive and in most instances will place your application back into normal consideration.
Example 2b: Breanna is similar to Brenda from example 2a where she does clear her account. However, she has had an existing car loan for years which she has always made sure that there is $200 per fortnight in her account so payments are made. Upon review of her statements whilst the lender acknowledged account clearing was evident, they were able to confirm A-rated payment history with her existing loan which led to her loan application being approved.
3. Dishonours With Existing Loans
A dishonour is a missed payment that is caused by insufficient funds being available for a payment to be fulfilled. This is not to be confused with a default which is a listing on your credit file for non-payment on numerous occasions.
A-rated history with lenders is generally regarded to support your loan application as it shows a willingness to make payments. The opposite of this however is a smoking gun to getting your application declined as this shows an inability to make repayments. Dishonours can occur for numerous reasons including insufficient income, high expenditure or simply mistiming with payday. Regardless, the onus is deemed to fall back on the applicant to ensure payments are made on time.
Why Lenders Care About This
When payments are not made with existing loan commitments on your most recent transaction history, it leaves little for lenders to support you making payments if it was them, let alone making their additional payments on top of what you are already paying. The same does apply for debt consolidation even when repayments are to be reduced overall. Lenders need assurance that their loan advance will not place you in a more difficult financial position .
Whilst it is common for clients to face adverse situations in the last 3 months that may lead to missed payments, this happening on a repeated basis will throw most explanations out of the window and will be disregarded in any finance application. In addition, instances of repeated dishonours are too far gone for any valid explanation to be presented.
Example 3: Charles had applied for caravan finance in anticipation for the upcoming summer holidays. Upon review of his bank statements, the lender noted multiple instances of dishonours and payments bouncing back from his existing car finance and personal loan. When he received his feedback, Charles became irate and blamed his existing loan providers, mentioning that they did not help him to properly make his direct debit payments timed correctly and that he had made numerous attempts with them to resolve this. He mentioned he planned to make a bulk payment to make up for it.
However, this did not line up with the bank statement conduct as both loan providers had clearly attempted to make direct debits with no avail. This only placed Charles in a worse light and was heavily turned down by all loan providers.
It should be noted that if dishonours are genuinely at the lender’s fault (ie: incorrect payment date agreed upon or the amount), your existing loan provider needs to be contacted straight away to rectify any incorrect direct debit arrangements. In no instance would a lender want their customers to continuously miss payments.
In a Nutshell
Bank statements can show even more than a person’s credit file given how recent the information presented is. As lenders hold a responsibility to reduce the risk of financial hardship, the request for bank statements assist lenders to make that clear determination. Ultimately responsible decisions ought to be made and bank statements provide clarity for lenders to make an informed decision. Lenders are taking more steps to ensure this is the case.
Remember the key rule of thumb about bank statements – once a lender has seen your statements they cannot unsee them. If you are unable about whether your bank statements may show any of the trends mentioned in this article, we can always look into your bank statements ahead of time to ensure you have the best chances of finance approval.
