My take on the lending changes coming into effect from 1st December 2021.
There are changes coming that will impact anyone who is wanting to borrow money. Everyone needs to be aware of this so that if one day you want to borrow some more money or buy a house you are more prepared. Here is my personal take on this. For more information, you can visit the Banking Ombudsman Website which has further links. Or speak to a qualified financial advisor at your bank.
The Credit Contracts and Consumer Finance Act 2003 (CCCFA) requires all lenders in New Zealand who enter into a consumer credit contract to take necessary steps to lend responsibly. So they must check and demonstrate that the lending is suitable and affordable for that customer.
A Consumer Credit Contract is generally for personal use such as:
– Home Loan
– Personal Loan
– Credit Cards
Effective from the 1st December 2021 changes are being made to enforce stronger obligations on all lenders, including banks to ensure that lending to their customers is affordable and suitable for that client. The aim is to further protect people from taking on unaffordable debt.
What will this mean for people wanting to borrow?
Lenders will be looking at your application much closer and will be analysing smaller details than ever before. This will be the case even if you are asking for a small top up.
You will need to provide more information to your lender, you will need to be prepared to answer more questions and provide more evidence than you have before.
The lender will very closely analyse all of your transactions for around the last 3-6 months. Including your income, debts and expenses.
This means the way you spend your money will be under the spotlight and will be run through with a fine tooth comb!
If your spending habits may be a cause for concern then it will not be favourable to your application.
Some areas that may look unfavourable:
– AfterPay or LayBuy purchases
– Going into overdraft on your account
– Running your account down to close to zero each pay period
– Excessive money being spent on groceries/food
– Excessive money being spent on alcohol
– Not saving money
– Missing payments
– Needing to transfer money from savings to top up spending
I personally am a big fan of these changes. I see the level of debt people have and if ANYTHING negatively impacted their income, they would be in serious trouble.
My hope is that these changes will reduce the overall new credit card lending being distributed to people.
These tougher restrictions which places the responsibility more on the lender, actually means that the client needs to take more responsibility for their own spending habits.
There is a lot in a lending application that the client can do to help show your ability to afford any new lending.
It also means if you need to improve some of your spending, that you are going to need to sort out your finances well in advance of visiting your bank.
If you are serious about lending more money or wanting to buy a new house, then you should really start preparing for your loan application 6 months prior to needing to apply. This gives you time to makes changes so you can demonstrate your affordability of the loan in the best way possible.
You will still need to meet the banks criteria, but you should also be making sure for yourself that you have the affordability for the new lending.
Gone are the days where you could walk into a bank and receive an answer within the day. You need to allow more time and approach the bank being prepared to go through the process which will take time.
If you start preparing much earlier with making improvements to your own finances this might help you gain a better outcome.
Remember, a bank or lending institution lending you money should be a privilege that you respect, rather than an expectation that you want upheld.
Too many people have an expectation that they should be able to borrow whatever they like providing they have a house that has enough value to secure the lending.
Just because you own a house does not mean you have good affordability to carry more debt. It would be very irresponsible for a lending institution to lend you more just because “You could sell your house and pay it back” if you needed to. That is not a good outcome for either party therefore it is not a good reason to lend!
It is your responsibility to demonstrate clearly to your bank that you can comfortably afford new lending. Its not the responsibility of the bank to workout how they can make you meet their criteria.
Own your part in the process, if you think you would need to make some changes to help a loan application then start now.
Here are some things you can focus on prior to applying for a loan:
- Pay off any Consumer debt you have. If you are spending money on paying off debt, then you cannot use that money to service another loan
- Save, save, save and show that you do not rely on that money. So if you are saving money and then transferring it back to use then you are not saving! If money goes into your savings account it should stay there.
- If you are buying a house. Remember its not just a deposit you need to save, you also need money for a Valuation, Lawyers, moving costs etc
- Do your bank statements show that you have good control of your finances? Or do they show that you live payday to payday and do not put money aside for your future?
- How much money are you spending on food (Groceries, Takeaways and eating out) ? Think about ways to gain better control over these expenses.
Remember these changes are here to protect you as a consumer.
If you are looking for more information, you can start here
YouChange is here to help you take better control of your own finances if borrowing is a future goal. Visit our website to find out more