Choosing the right lender may depend on the type of loan you're applying for, whether home, auto or something else. But whatever you're after, improving your credit score will likely be a vital part of that decision making progress.
Note — we're going to dive into the lending market, credit scores and improving your chances at a loan first. If you're already familiar with all of this information, you can skip to halfway.
An introduction to credit lending.
Credit-lending is a massive market. Few of us have the available money sitting around for big-ticket items or even sometimes for smaller ones. Life is full of surprises too, so often we suddenly need money a lot quicker than we originally planned.
Since so many of us need loans and access to credit, lenders tend to specialise in the types of credit they lend. Partly this is figured out based on what you're borrowing for (like a house) and the type of customer you are.
How do lenders figure out their customers?
One common way to access creditworthiness is through figuring out individual credit scores. These scores are part of a picture lenders try to create when they access your application for credit and figure out what deal they can offer (if any). They'll focus on your age, occupation, interests, and life goals. Because all customers differ, the loans offered to you will also vary.
It sounds like some people might be getting better loans.
Lenders will use all sorts of information to decide who to target their advertising to (which is why you might see a loan, while your friend won't).
However, your credit score is the one key piece of information that decides what interest rate you're charged at and how much you can borrow. Some lenders look to find people with low scores, while others focus on those with high scores and savings accounts.
Can I improve my access to credit and loans?
The great thing is almost anyone can improve their score and secure better loans in future. This is especially true for items that require no deposit, where your score will do all the talking. Other things like houses and car loans need a little more in savings before beginning.
Luckily, your score can lead you to better saving habits. Looking at your credit report (which you can do through Yonda without affecting your score) will indicate what to improve. Missed payments or multiple credit applications will show negative actions to be avoided. Yonda's notifications also contain essential information on what behaviours you should look to change and chart your progress month by month.
The gist is that if you're able to take out a small amount of credit or loan and repay at a steady rate, you can grow your score and save your bank balance at the same time. Dividing your earnings into money to put away, money to spend, and money to repay will also ensure you're saving a little to back up that excellent credit score.
How can I find a suitable lender for me?
Finding the right lender is as simple as working out what you can afford within your budget.
Let's consider this scenario. Dave is looking for a lender to help him secure a home loan. He has been with BNZ for some years and has a credit score of 580. He's seen a place for $400,000 and has enough to put down a 10% deposit. But, if he does, he'll be charged an interest rate of 4.1% until he can increase the loan by 20%. That's $16,400 extra Dave has to pay.
ANZ, however, is more focused on attracting first home buyers. They advertise a 1% interest rate for the first year, but this quickly increases to 4.2% after the first year is over.
Harmony isn't a bank, and so are less restricted in what they can offer. They want to help Dave out, so they charge him a 2.1% interest rate across the board. The loan, however, isn't fixed, unlike the bank's offer. So, while Harmony provides an interest rate of 2.1%, they may change the interest rate to whatever they like if the global market shifts.
All three of these examples are fictional and do not reflect the actual interest rates or offers of either BNZ, ANZ or Harmony. But what this does show is that all lenders have different interests in mind when it comes to their customers. All three are willing to deal with Dave but assess his risk differently.
BNZ is less interested in Dave, despite having banked with them for a long time. So they'll charge a high-interest rate until his credit score and deposit improves. They may also look at other factors before reducing the borrowing rate, such as the property's value or the house's compliance with modern safety standards.
ANZ is more interested in Dave but can only advertise reasonable rates for a year because Dave doesn't have a good enough score or savings to back himself up.
Harmony likes Dave the most and wants to cut him a good deal. But they're a business and so need some form of assurance. This is why they offer him a loan on condition (a floating-interest loan). They might also accept some other form of security to compensate (like Dave's car). Having security means they can charge a lower rate, as they can be certain of using Dave's car to cover the costs if he cannot repay his loan.
So what should Dave do?
That depends on what he can afford and what he's prepared to risk. Harmony offers the lowest rate, which Dave can meet, but he'll have to keep a lot aside if interest rates go up. Both banks at least have fixed rates, but they're a bit too high for Dave.
But Dave has also only looked at three credit providers so far. There's lots more out there, and all the while, Dave is saving money up and improving his chances of getting a better loan. He might even wait a few years to get the best rate and deposit 20% with BNZ.
What should I look for in a lender?
To begin with, look out for how much interest you'll have to pay and for long. Then consider the small print — will my interest rate remain fixed, and if not, can I afford a new interest rate if it goes up? Do I need to put down security? What's the deposit?
When you work out all of these, you can figure out what kind of risk you're most comfortable with taking.
There's a lot to consider with lenders. Not only are there the upfront costs and interest rates, but they'll be different hidden terms, depending on your risk. Hidden risks include whether the interest rate you offer is fixed or floating, first-year costs versus the second year, etc.
It's up to you to figure out your comfort level and plan for any changes in your loan arrangement. Luckily, Yonda can help — so if you're finished with this blog, why not read up on how to budget, so you can be sure to have more money to put towards a loan?