Why won't the bank lend me money?
If I had a dollar for every time I have been asked this question I could probably be a bank myself.
“I earn good money”, "I have a good deposit” and even “My mortgage payments would be less that what I pay in rent” are probably the most common statements people voice when they are asking me this question.
And even though lenders may differ in their processes, they all have a requirement to meet their responsibilities under the ‘Responsible Lending Code’.
Whilst there are no certainties in life these responsibilities help lenders to act prudently in accessing lending to customers. You can view a copy of the code here if you’re interested. https://www.mbie.govt.nz/assets/responsible-lending-code.pdf
So imagine yourself in this situation
You are relaxing at home one Sunday evening when there’s a knock on the door. Upon opening the door, you are greeted by your best mate, he strolls right on in pushing past you like it’s his own home but that’s all good because your friendship goes way back.
He drops himself into the armchair, the same one you were just sitting in, obviously the most comfortable and leaves you to use the couch. The normal chat starts up and then several minutes later out comes the real reason he’s there.
“Mate, somethings come up and I need to get to Wellington, my cars not that reliable and so I need to borrow yours for a few days”
You sit there in silence, you are mates from way back, so you have a great relationship. You really want to help but you know the reason his car isn’t reliable is it’s his third car, the last 2 got written off and the current one he never seems to prioritise the maintenance that it desperately needs.
What do you do?
Do you lend him your car at the risk of history repeating itself and you getting a call to say he’s had an accident, “Sorry mate your car’s a write off” or do you say “Love to help but right now I can’t”
These are the decisions lenders often face every day. Should they lend to you or are current observations present that might suggest it isn’t wise for both you and the lender right now?
Removing any perceived risk can give you a better opportunity for a successful outcome.
Three things you can do to improve your money maintenance and help lower any perceived risks.
- Evidence improvement
We all have money hiccups from time to time right. Have a way to evidence that you both addressed these appropriately and then took steps to avoid it in the future.
For example you may have had a $1,000 overdraft facility that has been constantly going $20 - $30 over each week just before you got paid.
By changing the dates to any automatic payments so it no longer goes into overdraft you would now be operating your overdraft within the limit.
Better still set a plan to get your overdraft completely paid off and then only ever use it for absolute emergencies and if you do, clear any balance again as quickly as possible.
An overdraft operating outside the limit suggests there is no room for the unexpected in your finances and you don’t really keep an eye on what’s happening, particularly if you have another account with money in it.
Having an overdraft but rarely ever using it suggests you have discipline with your money management.
- Keep Savings as Savings
These days we have the ability to name our bank accounts. The act of putting money aside into an account we have called ‘Savings’ has the subconscious effect of reinforcing that we are capable of saving money.
If we are constantly taking some of that money back to pay expenses the subconscious message starts to be replaced with the message ‘I can’t seem to save like I want to’
And think of it from the lender’s perspective. Are you capable of saving or are you simply putting money aside to spend a little later?
Set up two accounts.
- A savings account
This account you can put money into that you stay disciplined to not touch at all.
- A holding account
This account you can put money left over from each pay that isn’t needed immediately for paying future bills. You can simply move money back from again if you need to.
By creating this separation you are showing your ability to save money and leave it alone while at the same time saving for the unexpected. Whether it is buying a house or obtaining a loan for a car there will always be unexpected costs so do your best to be prepared for these.
- Have a money plan (not a budget)
They say that over 90% of people don’t have a budget and I would tend to agree. It’s one of the first questions I ask people when they first reach out to me.
And it makes sense right, after all we learned how to do math’s at school, we can subtract our expenses from our income in our head without too much difficulty.
So why would we need a budget. We know everything gets paid and we have money left over.
This is why I always recommend creating a plan and not a budget.
A budget shouts ‘I’m going to need to restrict myself and go without’
A plan says ‘I am intentional with where my money goes’
A plan also has a way to monitor what you are spending so you can focus on correcting any overspending. It also allows you to better assess the timeline for any financial goals you may have.
And having a plan means your money activity will be more consistent when a lender looks at what is happening on a day-to-day basis in your bank accounts.
A plan creates focused attention and self-accountability.
If creating a plan is new to you check out the Customised Moneytrainer System, designed to do what the name suggests. Train you to be more focused and proactive with your finances. You can find more details here.
Think of it like this
If your friend had turned up asking to borrow the car and knowing everything you did about his past history you also knew he had taken a defensive driving course after writing off his second car and had progressively been sorting out the maintenance issues of his current car, would that change your perspective on the risk?
Would that influence your decision to lend him your car?. I would suggest it would.
Something worth thinking about I am sure you would agree.
Why not put aside a little time to evaluate what active steps you could be doing to show you are fully engaged with your money.