Will a personal loan affect my mortgage application?

Will a personal loan affect my mortgage application?

Buying a house for many Australians can be difficult. You may have taken out credit cards and personal loans previously with no issue so assume that a home loan is no different. However, when you apply, you discover that even the smallest of your expenses seems to impact your chances of getting a home loan. So you ask the question, will a personal loan affect your chances of getting a home loan?

Mortgage lenders need to ensure that you’re capable of meeting your monthly repayments before approving your application. As part of reviewing your application, they’ll most likely evaluate your credit history, including credit cards, savings, and even closed and existing personal loans. This analysis helps the lender determine how much you can comfortably borrow and then repay if they approve your home loan application.

Essentially, a personal loan’s impact on your home loan depends on whether you can meet both sets of repayments without facing any financial stress.

How do personal loans negatively affect your mortgage application?

Most lenders usually use the debt-to-income (DTI) ratio when assessing your home loan application. This ratio determines the percentage of your pre-tax monthly income available to pay your debt and other household expenses. The lower your DTI ratio, the better it is for your application. Any form of debt is a liability, which leads to an increase in this ratio, including your personal loan.

The main concern that most lenders have while checking your application is how your personal loan impacts your spending power. When you apply for a home loan, the lender will assess your income and compare it to your expenses, including your personal loan’s monthly repayment. For example, say you’re paying $100  in monthly personal loan repayments, that’s $100 less available for your mortgage repayments.

Also, if you miss paying your personal loan repayments, it can impact your credit score. Any change to your credit score directly affects your mortgage application. This behaviour raises a red flag for lenders as it indicates that you’re an irresponsible borrower.

Do personal loans positively affect your mortgage application?

Lenders don’t always consider a personal loan as bad news when assessing your mortgage application. While lenders evaluate if you can afford the monthly repayments, they also give high value to your credit score. This is where a personal loan can help you move closer to an approved home loan. 

If you’re responsible with your personal loan, are consistent and timely with repayments, it will ultimately boost your credit score. A high credit score indicates that you’re a low-risk borrower, which will likely increase the chances of getting a home loan approved and access to better interest rates.

How can personal loans be used to boost your chances of home loan approval?

1. Don’t miss repayments

With the introduction of Comprehensive Credit Reporting (CCR), lenders can now access more information than ever before about your credit history. This increased access to information makes it more important to stay on top of your personal loan repayments and maintain a positive track record. Doing this will boost your credit score and help you land a good home loan deal. You could even consider making repayments that are more than the minimum monthly amount, as it demonstrates your ability to save.

If you have multiple debts, you could consider debt-consolidation through your home loan, which will help manage your repayments easily, while saving on interest.

2. Pay off or close as much debt as possible

A closed personal loan is no longer considered a liability and therefore, doesn’t negatively impact your DTI ratio. So, if you’re not in a hurry to buy a house, you could consider clearing your debt first before applying for the home loan. Also, if you’ve got multiple credit cards, consider closing or reducing the limit on a few to reduce your DTI ratio. This will then increase your chances of getting a home loan approved.

3. Don’t overdo credit applications

Having a personal loan that is repaid on time can work wonders for your credit score. But, it’s important not to go overboard by applying for too much credit. Every time you apply for credit like personal loans, you will undergo a hard enquiry on your credit history, expenses and debt. A hard enquiry then appears on your credit file, and too many hard enquires can impact your credit score. Also, if you have too many on-going hard queries, lenders might think you’re financially careless or desperate for credit.

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Learn more about personal loans

What is a personal loan?

A personal loan sits somewhere between a home loan and a credit card loan. Unlike with a credit card, you need to sign a formal contract to access a personal loan. However, the process is easier and faster than taking out a mortgage.

Loan sizes typically range from several hundred dollars to tens of thousands of dollars, while loan terms usually run from one to five years. Personal loans are generally used to consolidate debts, pay emergency bills or fund one-off expenses like holidays.

What is a bad credit personal loan?

A bad credit personal loan is a personal loan designed for somebody with a bad credit history. This type of personal loan has higher interest rates than regular personal loans as well as higher fees.

Can you refinance a $5000 personal loan?

Much like home loans, many personal loans can be refinanced. This is where you replace your current personal loan with another personal loan, often from another lender and at a lower interest rate. Switching personal loans may let you enjoy more affordable repayments, or useful features and benefits.

If you have a $5000 personal loan as well as other debts, you may be able to use a debt consolidations personal loan to combine these debts into one, potentially saving you money and simplifying your repayments.

Can I get guaranteed approval for a bad credit personal loan?

Few, if any, lenders would be willing to give guaranteed approval for a bad credit personal loan. Borrowers with bad credit histories can have more complicated financial circumstances than other borrowers, so lenders will want time to study your application. 

It’s all about risk. When someone applies for a personal loan, the lender evaluates how likely that borrower would be to repay the money. Lenders are more willing to give personal loans to borrowers with good credit than bad credit because there’s a higher likelihood that the personal loan will be repaid. 

So a borrower with good credit is more likely to have a loan approved and to be approved faster, while a borrower with bad credit is less likely to have a loan approved and, if they are approved, may be approved slower.

How much can you borrow with a bad credit personal loan?

Borrowers who take out bad credit personal loans don’t just pay higher interest rates than on regular personal loans, they also get loaned less money. Each lender has its own policies and loan limits, but you’ll find it hard to get approved for a bad credit personal loan above $50,000.

Which lenders offer bad credit personal loans?

Several dozen lenders offer bad credit personal loans in Australia. These are generally smaller lenders that aren’t household names.

What are the pros and cons of bad credit personal loans?

In some instances, bad credit personal loans can help people with bad credit history to consolidate their debts, which can help make it easier for them to clear those debts. This is because the borrower might be able to consolidate several debts with higher interest rates (such as credit card loans) into one single debt with a lower interest rate and potentially fewer fees.

However, this strategy can backfire if the borrower spends the loaned funds instead of using it to repay the new loan. Another disadvantage of bad credit personal loans is that they have higher interest rates than regular personal loans.

Can I get a no credit check personal loan?

Personal loans with no credit checks are available and called ‘payday loans’. These are sometimes used as short-term solutions for cash-strapped Australians. They often carry higher interest rates and fees than regular personal loans, and individuals risk putting themselves into a worsened cycle of debt.

Can I get a $4000 personal loan if I’m unemployed or on Centrelink?

Before most providers of personal loans or medium amount loans will approve an application, they’ll want to know you can afford the loan’s repayments on your current income without ending up in financial stress. Several lenders don’t count Centrelink benefits when assessing a borrower’s income for this purpose, so these borrowers may find it more difficult to be approved for a loan.

If you’re unemployed, self-employed, or if more than 50% of your income come from Centrelink, consider contacting a potential lender before applying to find out whether they accept borrowers on Centrelink.

Are there $2000 emergency loans?

If you’re having trouble being approved for a loan of less than $2000 and urgently need to purchase household essentials, there may be emergency loan options available to you.

For example, the No Interest Loans Scheme (NILS) allows low-income borrowers to take out interest-free loans of up to $1500 for essential goods and services.

For further assistance, consider contacting a financial counsellor, or calling the National Debt Helpline on 1300 007 007

How long do personal loans take?

Depending on the lender, some personal loan applications can be approved in as little as one hour, or you may need to wait until the next business day. If approved, you may receive your money on the same day, the next business day, or within the week.

How long does it take to get a $5000 loan?

Depending on the lender, personal loans and medium-amount loans for $5000 can sometimes be approved in under an hour, and give you access to the money the same day. Other loans may take 24 hours or longer to assess your application, and you may not get the money for a few days.

What do credit scores have to do with personal loan interest rates?

There is a strong link between credit scores and personal loan interest rates because many lenders use credit scores to help decide what interest rates to offer to potential borrowers.

If you have a higher credit score, lenders will probably classify you as a lower-risk borrower. That means they’ll be keen to win your business, so they may offer you a lower interest rate if you apply for a personal loan.

If you have a lower credit score, lenders will probably classify you as a higher-risk borrower. That means they might be concerned about you defaulting on the loan and costing them money. As a result, they might protect themselves by charging you a higher interest rate.

What do single parents need for a personal loan application?

Much like applying for other personal loans, applying for personal loans for single parents will likely require the following:

  • Proof of identity
  • Proof of residence
  • Proof of income
  • Details of assets (e.g. car, home)
  • Details of liabilities (e.g. credit cards, other loans)
  • Loan amount
  • Loan term