When seeking all types of loans and finance, for both consumer and business purposes, there are numerous issues that will come into play to determine the loan offer made. One of these is borrowing power or borrowing capacity. For those considering making a major purchase with finance, Jade Finance explains borrowing capacity and how loans are affected by borrowing power.
Borrowing power can have an impact on the interest rate offered, the loan amount approved and in some instances the type of loan product. All these aspects may have an impact on exactly what goods – make, model, ticket price - that can be purchased. So before getting that wish list or purchase locked-in and possibly a non-refundable deposit paid, it may be worth understanding how individual borrowing power may have an influence in the buying decision.
Borrowing Power: Overview
Borrowing power is also known as borrowing capacity and is, in the most simplest terms, an individual’s or business’ capacity to take on a loan or debt. That is how much a person or business may be approved to borrow in terms of loan amount.
If you’ve ever applied for or considered taking on a home mortgage then you would likely have encountered the term borrowing capacity. It is widely used in that lending market and many home mortgage lenders will provide calculators for loan applicants to calculate their borrowing capacity. This provides a useful guide to what price range they should be considering.
When it comes to our area of lending – consumer and business finance – the borrowing power of the loan applicant will form part of the overall loan approval process. While we may not use that specific term widely, it is an integral part of our business.
Understanding how borrowing capacity is assessed or calculated by lenders can give buyers a better indication of the price range of cars, boats, caravans, motorcycles, trucks or business equipment they should be considering.
When deciding on a major purchase with finance, most people will have a figure in mind that they can afford in terms of loan repayments. But in some cases, that figure may be stretching their budget or their expectations and may vary from the specific capacity as assessed by a lender.
It should be noted that Jade Finance is a Licensed Credit Provider which is a status conferred under ASIC. This means we abide by the Responsible Lending Guidelines and Australian Consumer Credit Laws. These clearly state that a loan offer cannot me made to a consumer where it is deemed inappropriate.
Lenders will use information as supplied by loan applicants and through their own research to assess borrowing power. It includes evaluating a range of financial data including income from all sources, debts and loans including credit cards, weekly and ongoing household and general expenses. The assessment can include a consideration of spending habits – what discretionary income is spent on.
The credit profile is an important part of the loan approval process but this relates more to the trustworthiness of a person to repay a debt than the actual capacity to meet the repayments. A good credit score does not equate necessarily to an increased or enhanced borrowing capacity.
But having a good credit score and strong credit profile is essential to achieving the cheapest loan offer.
Impact on Loans and Finance
Borrowing power can affect the type of loan offered and the elements of any loan offer but especially the total loan amount. It is relevant to boat loans, car loans, caravan finance, motorcycle loans, truck loans and all types of business finance.
When applying for a loan, the applicant will usually have decided on the purchase and a total loan amount requested decided on. If the borrowing capacity as assessed by the lender is not in line with that request, a number of outcomes may unfold:-
- If our consultants assess the amount requested as potentially not meeting capacity guidelines, we will advise the customer upfront and discuss the options to change the loan application accordingly.
- The loan application may not be approved by that lender. As we are accredited with many lenders we will be handling the process and be approaching the most appropriate and suitable lender.
- The lender may request that the loan amount is reduced to a lesser amount in order for the application to be approved. These opens a number of pathways for the buyer. They can decide to pay a deposit on the goods from their funds and hence reduce the loan requested or they can select a lower priced model or make of those goods.
- A higher interest rate may result of a high risk assessment of the application. Our customers are not obligated to accept offers, it is their decision. We would discuss the options and source other loan offers in these cases.
Improving Borrowing Capacity
With this information on borrowing power, those considering a loan may wish to address certain aspects of their financial situation with a view to improving their borrowing power prior to submitting a loan application.
Ways of achieving that may include:-
- Cutting back on non-essential spending over a period of time.
- Reducing debt levels by paying off any credit card balances or finalising other loans.
- Considering options for cheaper priced makes and models.
To assist with all buying decisions, we invite you to use our finance calculators. While they do not allow for consideration of borrowing capacity in the computations, they do deliver repayment estimates as a useful guide for buyers.
Contact Jade Finance by phone 1300 000 008 for quotes on both personal and business finance
DISCLAIMER: NO LIABILITY IS ACCEPTED IF ERRORS OR MISREPRESENTATIONS ARE FOUND IN THIS ARTICLE. THE ARTICLE IS PREPARED AND PRESENTED FOR GENERAL INFORMATIVE PURPOSES AND IS NOT INTENDED TO BE THE SOLE SOURCE OF INFORMATION FOR MAKING FINANCIAL DECISIONS. THOSE REQUIRING GUIDANCE AND ADVICE SHOULD CONSULT A FINANCIAL ADVISOR.