No seriously don’t do it. If you are doing it, just stop.
It is no secret that obtaining finance approval with most financial products is becoming increasingly difficult over the past few years. Lenders have been requesting for more information to ensure that they are lending responsibly. This is also to ensure that they base their credit assessment on the correct information.
One common request is widespread among the lenders for all financial products (for example credit cards, personal loans, mortgages, asset finance, etc). This is the request for bank statements which provides lenders more transparency for assessment purposes and to be confident that the information provided in an application is correct and accurate.
Whilst there are many factors that lenders need to consider when assessing bank statements, one particular characteristic of banking has been frown upon. This article will be focusing on only this characteristic known as account clearing.
What is account clearing?
Account clearing is the act of receiving income and on the same or subsequent day withdraw or transfer that income into another account. This is generally seen with customers who prefer to make cash in hand transaction as opposed to electronic transactions when purchasing goods or services.
Given that there are limited funds in the account at any given time, transactions involving expenses cannot be identified, and is therefore unverifiable. It goes without saying that an account clearer’s bank statements are very barren given that there are limited transactions showing. With cash transactions utilised over debit cards, there is limited information available for a lender to properly assess your loan application.
Example 1: Leanne does not trust her bank with her spending information. Upon receiving her weekly wage, she will visit her nearest ATM after work and clear her account to near $0. For the rest of her week, any shopping made will be completed by cash transactions.
This is a text book example of account clearing regardless of whether Leanne has overdrawn her account past $0 or not.
So Why Do Lenders Hate This?
Insufficient Information to get Comfortable
When a lender is conducting their credit assessment, information is key to make a sound credit decision. This means information with regards to not only income but verifying an applicant’s expenses.
Without sufficient information to verify household living expenses, lenders unfortunately have to decline an application automatically or consider the account clearing amount as a full expense. As the expenses equals income when account clearing, this subsequently leads to a decline due to insufficient affordability. In other words, affordability is impossible if you spend as much as you receive in income.
Remember that bank statements are utilised by lenders to assess both income and expenses. Showing only income is not enough.
Problems with Direct Debiting
Another point to consider is how a lender will be able to direct debit funds from an account that has no money available. Payments will be dishonoured and as a result the client falls behind on loan repayments, leaving the lender to chase up the poor client.
A common argument against this viewpoint is that a client can change the method as to how they manage their bank statements upon taking out finance. However, this is seen as too high of a risk to consider. Lenders review bank statements to show historical patterns for assessment. If a customer has shown a trend of clearing funds from their account, then it is assumed that this pattern will continue to remain.
An exception to this rule is having enough money in the account in order to justify that the account would allow direct debiting. If an applicant has shown the ability to make repayments with an existing commitment was having the rest of the funds cleared this at least shows a willingness to make repayments. For the lender’s benefit, they can have comfort with this sort of behaviour as this helps supports a client’s character (their willingness to make repayments).
Example 2: John has recently gotten into the habit of account clearing his monies on a weekly basis from when he is paid from work. Whilst John’s outgoings are quite low, he does have a car loan outstanding which he pays $100 per week. He has made sure that he keeps enough money in his account and has ensured that his car finance payments direct debits a day after he receives pay. The order of events on a weekly basis is as follows:
1. John is paid his weekly income from work
2. The next day John allows his car payments to automatically direct debit as normal
3. John withdraws all his money from his account after the car payment is made
John needed personal finance to help repair his car. Upon reviewing his bank statements, John was subsequently approved for finance. Despite account clearing he has shown his ability and willingness to make his repayments meeting the lender’s criteria.
It should be mentioned that the above exemption applies only to financial commitments/loans rather than other forms of direct debiting. For example, payments to your gym membership or energy provider will not hold the same weight as a loan.
The Proof is in the Pudding (or whatever tastes the Ppposite of Pudding)
In addition to the above points, financiers that have previously accepted account clearers in the past have been badly stung. Some lenders have almost closed down because of it, yikes!
Statistics in collection departments have confirmed that account clearer have an exponentially higher chance of defaulting on a financial commitment compared to one who retains funds in the account. Such accounts have often led to recovery actions (ie: Repossession or sending out debt collectors) and in more severe cases declaration of bankruptcy or part 9 debt agreement.
As a result of collective past data, lenders whom have once accepted account clearers with open arms have now enforced strict policies to knock out (ie: auto decline) account clearers altogether.
So Why Do People Account Clear?
Whilst it may seems like an extra hassle to withdraw cash on a regular basis, transacting by cash is still considered the norm for some across Australia. The convenience of electronic transactions hasn’t bode well with some still sticking to the old school method of transacting by cash in hand.
For many however, frequent ATM withdrawals are made by some for other personal reasons. Below are some reasons that we have noticed from experience.
“I Never Trust the Big Bad Banks”
Some have commented about their overall distrust for banking institutions due to concerns about tracking their transactions. There are still people that prefer to keep their money under their pillow instead of in their savings accounts to accumulate interest.
Privacy concerns are apparent and is a genuine concern. If you have privacy issues or concerns with a particular bank, it is recommended to raise this directly with them.
“There are no EFTPOS Machines Around”
In some communities, electronic transactions are just not utilised. Whilst this is seen regionally, even some metropolitan and suburban communities are not open to keeping monies in the account.
If there ATM machines available all over your community, it may be best to just take out the money you need in the moment.
“I don’t like my Lender, I hate making payments even when I agreed to!”
The last and unfortunate reason is that some intentionally account clear to avoid meeting their fixed expenses and loan repayments. Yes, this means having your account intentionally dishonours to avoid making any payments whatsoever.
If you’re doing this, please stop and do the right thing. Seriously.
In a Nutshell
If you’re currently account clearing, now is the time to rethink how you manage your monies as your finance options are limited to none. This makes it impossible to get into your new car or house.
The good news is that it is an easy habit to overcome. Keep some money in your account and make some electronic transactions once in a while!