How to borrow money in Australia

Borrowing money in Australia isn’t as easy as walking into a bank and walking back out with a big bag of cash. Whether you’re borrowing money to buy a home or for other purposes, you’ll need to fulfil certain eligibility criteria to see your loan application approved.

Why are you borrowing money?

Before a bank or similar financial institution will lend you money, they’re likely to want to know how you plan to use it. Generally, you’re more likely to get a loan approved if you’re borrowing money for a responsible purpose than an irresponsible one.

You may be able to borrow money to make a large purchase, such as buying a home, an investment property, a car, or even shares. It’s also possible to take out loans to pay for large one-off expenses, such as a holiday or a wedding, though as many lenders consider these loans risky, they may charge higher interest rates and/or fees.

You may also be able to borrow money to help pay for smaller purchases and everyday expense by using credit cards.

What are you using as security? 

A lender may be more likely to approve a loan application if the borrower offers security or collateral for the loan. This is a valuable asset that the lender can seize if the borrower can’t pay back the loan.

In most home loans and many car loans, the security is the property or vehicle being purchased, which the lender can repossess and sell if the borrower defaults on their repayments. In the case of home loans, you’ll likely need to pay a deposit on the property upfront to help ensure that the loan to value ratio (LVR) isn’t too high.

You may be able to use equity in a property, a vehicle, savings in a term deposit, or other valuable assets to secure a personal loan, though it may not be necessary. Unsecured personal loans may instead charge higher interest rates and/or fees, and you may be subject to legal action if you default on the repayments.

Can you afford the loan repayments?

Lenders will often want to know about your household income and expenses before they’ll offer a loan, so they can be confident that you can comfortably afford the loan repayments. Lenders often check these numbers carefully to assess the risk that you could end up in financial trouble if circumstances were to change, such as if interest rates were to rise, you were to lose your job, or your household expenses were to increase (such as if you added a child to your family).

To confirm that you can manage the repayments, you may need to provide proof of your income and expenses, such as payslips, tax returns, or bank statements. Borrowers who are self-employed, contractors, or who otherwise don’t earn a consistent wage or salary, may need to provide extra proof that they can afford a loan.

How’s your credit history?

In Australia, your history of borrowing and repaying money is collected and recorded by credit bureaus, and used to generate credit scores. generally, borrowers with a history of successfully borrowing and repaying money are more likely to have high credit scores, while those who have missed repayments and had other money troubles in the past are more likely to have low credit scores.

Lenders use credit scores to quickly get an idea of a borrower’s financial responsibly, and  how risky it may be to offer them a loan. Borrowers with good credit are often more likely to have their loan applications approved, and benefit from lower interest rates and fees, while bad credit borrowers may need to pay more in interest and fees to borrow money, or see their loan applications turned down.

You can check your credit score to get a better idea of how lenders see you before you apply to borrow money. If your credit score is lower than you’d like, it may be possible to improve it over time by practicing good credit behaviours, such as repaying loans and bills on time.

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