Are Low Doc Loans a Lifeline for the Self-Employed?
To summaries the answer in just 3 words: Yes, they are! Growing businesses is hard. Especially when so many money lenders are rigid with their income verification processes. For this reason, low doc loans are the lifeline of the self-employed, although the unemployed, seasonal workers, or those with next-to-no credit history (such as new immigrants) can apply as well. Low doc loans are, simply put, loans that require little to no documentation or credit history.
Naturally, this means a higher risk in the eyes of established lenders such as banks. Freelancers and self-employed people have a hard time proving their income to request a ‘full doc’ loan due to the fluctuating nature of their occupation. Some self-employed individuals might opt for a ‘normal’ loan if they meet certain conditions. If you’re thinking about low doc loans, it’d be wise to consult your financial adviser. Nothing stops you from getting one, but it’s better to go for a ‘full doc’ one if you can. Low doc loans are meant to support individuals with different financial characteristics. They carry some disadvantages such as:
Higher Interest Rates
Lenders offset the risks involved with ‘low doc’ borrowers by charging higher interest rates. Bear in mind that this isn’t always the case. Generally, the more documentation you bring, the lower the rates, up to the point where you’d get charged the same for a standard loan. This reason alone should make you think carefully about your lender choice.
Some low doc loans require you to deposit 20% of the purchase price. Like before, this doesn’t apply to all lenders. Others require a smaller deposit.
This isn’t so common nowadays, but some lenders won’t give you the loan if you don’t secure it with an asset. Avoid this at all costs! This practice is a bit common in high-demand locations, such as capitals or regional centres. If you have to put your house or your car on the line to get it, then it’s not worth it.
How Do the Self-Employed Apply for Low Doc Loans?
Don’t mistake ‘low doc’ for ‘no doc’. Modern-day lenders require you to provide supporting financial documents to verify your income.
Each lender is different and will accept various document types to back your claim. You should always bring:
- A year’s worth of Business Activity Statements (BAS)
- An accountant’s letter verifying your income
- Australian Business Number (ABN). Preferably 12 months old
- Registered Business Name
- Interim Financial Statements
This isn’t all you can bring, but it’s the baseline.
What Else Should I Have in Mind?
Your credit report plays a vital role in this department. Lenders will look closely at your credit file; if they spot repayment problems, you’ll have a hard time convincing them to give you a chance.
Lenders will use common sense when approaching your declared occupation, income, and age. For example, an 18-year-old student stating an income of $300,000 would be declined, as banks are required to meet responsible lending legislation.
Asset to Income Ratio
Having a desirable asset to income ratio helps lenders give you the loan. A net asset position equal to 1.5 or 2 times your annual gross income makes you more than a good borrower in the eyes of standard loaners. Unfortunately, this isn’t the case for younger applicants.
Fixed or Variable
Surely, you’ve heard about fixed or variable interest rates. To make it simpler, ‘fixed rate’ means your interest rate will remain static, it won’t increase or decrease through the period except in certain situations, and ‘variable rate’ means your interest rate will fluctuate. It’s difficult to say with precision which is better for you. It all depends on the circumstances. Fixed rate tends to be the solution when finances are hard, as variable rates will consistently increase. The contrary applies, however. When finances are good, variable rates will drop. If you want to get the best deal, you’ll have to get in touch with a professional financial adviser.
Not everyone has the means to provide the rigorous documentation that some banks need to approve ‘full doc’ loans, but that doesn’t mean you must give up your business! Low doc loans are a great option to add more money to your reserves. This way, you can focus on improving your business, paying employees, financing equipment, and even renovating your store! At any rate, it’s imperative you get your low doc loans from the right lender, as that might be the difference between a solution or a new problem. If you’re having a hard time finding a good lender due to your bad credit, get in contact today with Bad Credit Loans.
What you’re looking for is not the problem, it’s where you’re looking that counts! There are several lenders willing to help self-employed Australians satisfy their financial needs, but make sure you choose the right one.