February 27, 2019
“My loan was declined because the bank said I was getting too many Uber Eats!”
We all have a story that we’ve heard at the office, on the weekend or on our favourite morning tv shows about somebody who didn’t get a loan because of some strange reason. But is this really possible? Can a lender decline a loan for getting too many “Uber Eats”?
Well, the truth is yes and no.
To help understand this answer, let’s have a look at the lending process a little more closely.
Recently it has become more difficult to get a loan. Increased government regulations and requirements on lenders has been passed onto borrowers through greater scrutiny during the application process.
If we look at the process a little more carefully, we might gain some understanding in what’s happening. When applying for finance (be it a home loan, personal loan, or even a credit card), lenders want to be reasonably sure that you are going to have the capacity to repay the money you borrow. To do this, they assess your application across a number of fronts, but there are two in particular that determine how much you can borrow. These are – how much income you receive and what your personal expenses are.
Income is relatively easy to assess for most people – we go to work, do our jobs, and finally get a piece of paper showing us how much we have been rewarded for our efforts – also known as our payslip.
Expenses on the other hand are a little more difficult to assess. That’s because you may not have fixed spending habits and everybody is free to do what they like with their money. So lenders want to understand how much you spend.
Many people have a component of fixed spending – car loans, credit cards, phones and utilities.
But other expenses, such as your general day to day living expenses – the trip to the double golden archway restaurant, the pair of shoes you need for the weekend or the little flutter you might enjoy with a glass of sherry from time to time – are more difficult to account for.
For most lenders, part of the application process requires borrowers to assess their living expenses. To assist the borrower, there are generally 10-15 categories that can be used to assess living expenses. These include regular commitments (e.g. credit cards and utilities) through to categories such as pets, insurance, entertainment and motor vehicle costs.
Along with the assessment, lenders are asking for evidence. This can include copies of statements of your transaction and savings accounts, credit card bills and any other existing loans you have in place.
When we also take into account that on average, mortgage repayments equate to approximately 30% commitment of your income it becomes clear why a good understanding of living expenses is required. If your living expenses are quite high – for example because you have private school fees, a large weekly food bill or the kids are committed to expensive sports – you may end up putting yourself under financial stress due to not being able to satisfactorily address all your financial commitments. Under responsible lending obligations, lenders are reluctant to approve a loan that results in putting borrowers into financial stress.
If we think back to the original question, can too many Uber Eats reduce your ability to get a loan? While it probably isn’t due to Uber Eats per se, it is possible, if your living expenses reflect a lifestyle of exuberance with the inability to easily cover future commitments to not have a loan approved (or offered a lower amount than required). However, if you are living within your means and Uber Eats is part of your general living expenses, then no, it is unlikely that your loan will be declined on that basis. Your spending habits show a bit about your character and the potential to repay any loans.
So if you are looking at getting a home loan, you may want to do a self assessment first. Review your expenses and see if there is anything you can cut back. Are there expenses that can be construed as undisclosed liabilities? Do your expenses reflect a character of regularity and commitment? If you were to sell up all your assets, would you still owe money?
Reducing your monthly expenses will increase your loan repayment abilities with the added benefit that you will increase your savings for the purchase. Lower expenses generally means a little more available for repayments, which means paying the loan off quicker or getting a larger loan if required. The other benefit is that cutting back on expenses before getting a loan can result in more savings to contribute to the purchase of your home, which is definitely a good thing!
So the next time you hear a story about a friend having their loan declined due to too many Uber Eats, just ask yourself, was it the Uber Eats or was it exorbitant living expenses.