Getting approved for credit
Before you borrow or ask your lender for a top up, lenders need to ask detailed questions about your income, expenses and current circumstances, including any likely changes to the income you’ll rely on to repay the loan.
Lenders will also need to ask what the loan is for to make sure they provide the right type of finance.
Lenders are legally required to conduct a thorough affordability and suitability assessment in most circumstances, and this may take some time.
Before finalising an agreement to take out a loan or to buy on credit, the lender must take reasonable steps to make sure:
- you can afford repayments without undue difficulty
- the credit product they provide can meet your needs
- if you require a guarantor, they properly assess a guarantor’s ability to pay without undue difficulty
- that any additional add-on products like credit related insurance are suited to your needs and the costs are acceptable to you if you want them financed as part of the agreement.
What to expect from all lenders providing consumer credit
Lenders need to know the finance product they provide is suited to what you are trying to achieve with the loan.
To do this, they must ask, where relevant:
- how much you need to borrow or the credit limit you require
- what you need the loan for
- what length of term best suits your needs or, if it’s a revolving credit facility like a credit card, whether you need credit on an ongoing basis
- where there are any non-avoidable fees or charges for additional goods or services over and above your stated needs, whether you want those and accept their cost
- if the agreement requires lump sum repayments, whether you are happy making lump sum repayments in preference to regular repayments
- if there is a delay in receiving your financed goods of more than 20 working days from the agreement date, when would you like to receive the goods
- if you are refinancing your loan, what you want to achieve by refinancing the loan and whether you accept any known associated costs
- if you are considering a reverse mortgage, what your future needs and objectives are, including aged care or leaving equity in the property, and how you would like the advances to be paid out.
Using this information, the lender will work out the most suitable products to meet your requirements and discuss the options available if there is a range.
Lenders must work out whether your income exceeds your current expenses
To do this, they must ask about:
- the income you will be relying upon to repay the debt and how sustainable that is
- fixed financial commitments such as accommodation costs, insurance, rates, school fees etc
- existing debt repayments
- regular living expenses such as utilities, transport, medical costs, child care etc
- any other regular or recurring outgoings that you are unwilling or unable to stop such as savings, membership fees, tithing, entertainment costs etc
- what you have planned or anything you can see on the horizon (foreseen circumstances) that might change your future income
- if you already have a loan with that lender, whether you have taken on any other loans (or they may check your credit report).
Lenders will need to verify some of the information you provide
To do this, lenders will be asking for supporting documentation such as pay slips, bank statements, contracts or other reliable evidence of your income and expenses.
To ensure expenses are properly accounted for, lenders will need to:
- check for any missing expenses, for example you might be getting a loan for a car and the expenses associated with owning a car may have been missed
- make adjustments if necessary, to ensure the expenses are realistic for your circumstances
Lenders may also do a credit check. This is mandatory when you apply for high cost loans, such as loans where the annual interest rate is 50% or more.
The lender will then use this information to work out whether you can afford the loan repayments. The lender can only lend when your income exceeds your expenses.
If you are financing credit related add-on products like insurance, waivers or warranties
Lenders need to help you understand these products and work out whether they are suitable for your needs and affordable if you decide to include them in the finance arrangement.
To do this, they must ask about:
- what risks or circumstances you are wanting the insurance, waiver or product to cover
- whether you have pre-existing cover, or whether your rights under the Consumer Guarantees Act will protect you against some or all of the risks you need cover for
- whether your employment status, residency or age may make you ineligible to claim on some or all of the benefits you are seeking cover for
- whether you accept the costs of the add-on products
Lastly, lenders have to keep records of their assessments and these are available to you upon request. The records need to show how the lender used the information to arrive at their decision. If you would like to see them, you can make a request and the lender must provide them to you for free within 20 working days.
If you need a guarantor
In some circumstances, lenders may ask for a guarantor. This person will need to pay your loan if you can’t, and lenders must assess their ability to pay without undue difficulty before the guarantee is given. If lenders don’t properly assess the guarantor’s ability to repay the loan, they won’t be able to enforce the guarantee.
What to bring
Come prepared with documents that show:
- your regular income such as payslips
- your current expenses
- other debt repayments
- 3 months-worth of bank statements from your usual transactional account.
- Other relevant documents which may include:
- your employment contract, especially if you are on part-time or temporary work or 3 month trial period
- If you are getting income from a boarder, consider how you might show the lender it’s real and how long it might last for.
It’s best to give the lender as much information as possible, especially about circumstances that may impact your income or expenses after you get the loan.
Lenders need reliable information to be able to make good lending decisions.
There are some circumstances when lenders might not have to do a full assessment
If you are re-financing or varying your contract and you are not applying for more credit at the same time, then a full assessment won’t be necessary. One example is a variation for unforeseen hardship.
Another situation is when you are not relying on regular income to repay the debt, and make this known to the lender, for example when you are using the proceeds from the sale of an asset to repay the loan in full. Also, if your income significantly exceeds your expenses and you are highly unlikely to experience significant financial hardship repaying the loan, a full assessment might not be necessary.
Lenders must still act with care, diligence and skill and this doesn’t mean you won’t be asked any questions. They must still take reasonable steps to work out your financial position.
If you are getting your finance arranged through a broker or a car dealer, they may make the initial inquiries,or may take you through the full assessment process, depending on what has been arranged with the lender. Lenders must complete a full assessment in most circumstances, whether they do this themselves or through a broker or a car dealer.
Applying for a loan checklist [PDF, 422 KB]
Applying for a loan checklist — Māori [PDF, 374 KB]
Applying for a loan checklist — Sāmoan [PDF, 367 KB]
Applying for a loan checklist — Tongan [PDF, 369 KB]
Credit checks, scores and history
Sometimes insurance or an extended warranty is a condition of buying on credit, so long as these cover reasonable risks and don't double up on insurance you already have.
- payment protection insurance so payments can still be made if something happens, eg you lose your job
- gap insurance to pay the balance if the product is destroyed and your other insurance does not fully cover what you still owe.
Before you sign anything, the retailer or finance company must make sure the insurance meets your requirements and you will be able to make the insurance payments. They must also give you a copy of each policy before the insurance is arranged.