Low Doc Loans – When Should You Get One?
Are you in need of a loan and you don’t want to go through the ordeal known as paperwork?
We know that paperwork is something that nobody wants to have to deal with. But when we are talking about loans, there is not much that can be done in order to avoid it. Or is it? Find out what we’re talking about.
What Are Low Doc Loans?
Low doc stands for low documentation; so, you can get these loans without the normal analysis of your income and papers. This means that all you need is an income declaration, as well as an evidence of reduced income, often in form of an accountant’s declaration or business account statements.
This will prove that you have enough income and the bank will accept it without needing to see your other financial records.
Who Can Use This Type of Loan?
There are plenty of reasons that may lead people to resort to low doc loans, besides the basic one of not being able to provide information to lenders. Let’s see what other reasons are there:
- Reason #1 – Self-employed people
They are more than likely to show proof of lower income in order to reduce taxes, but this may backfire when they apply for regular loans.
- Reason #2 – Young workers
The youngsters who haven’t worked for a long time come with a history of low wages, proportional to their lack of experience. Or they may come with no history whatsoever. In either case, they aren’t likely to get loans easily, so a low doc loan might be a solution.
- Reason #3 – The need for privacy
This is a right for most people and you should be able to keep your income level to yourself.
- Reason #4 – Fresh business owners
When we talk about new businesses, it is a well-known fact that the owners can’t show a past of consistent profit. Usually, it is required to have a few years of experience before applying for loans.
Besides the situations we mentioned, we must also mention another thing. It is incredibly frustrating to search everywhere in your house to find every piece of documentation that you might need. Moreover, organising it all is another chore that nobody wants.
They Are a Good Solution When You Don’t Have Proof of Your True Income
Low doc loans are great for this specific case. Let’s say that you don’t have the updated tax returns. In this situation, should you postpone the loan? No.
If your income has increased since the previous tax return, then you won’t have problems with low doc loans. This is similar to the expenses categorised as “not real”, like depreciation, which is a large deduction.
Also, you may find yourself in a company that has a structure much too complex to gather all the necessary documentation. And when we are talking about family members, your income may be distributed among those you trust.
There are some businesses that work with cash that doesn’t show up on the tax returns. We’re talking about restaurants, taxis, retail outlets or tradesmen. Since their profit doesn’t appear on the tax returns, they are left with an “official” income that may be deemed too low by lenders.
If you find yourself in any of these situations, then you should definitely opt for low doc loans.
What Are Need for Low Doc Loans
At their birth, these types of loans were accessible only from a handful of lenders who offered them at expensive rates and with limited lending criteria. Still, nowadays, low doc loans are more popular and available than ever.
You’ll need an ABN (Australian Business Number) running for a minimum of two years. Also, it has to be registered for Goods and Services Tax. But if you are lucky, you may come across lenders that accept ABNs that are just one day old.
What Is the Cost?
Since we praised them so highly, let’s talk about the costs of low doc loans. Nothing is free, and since you will not provide your income by using standard documentation, you will be a bit risky for lenders. That’s why the price of these loans is higher than the one of regular ones. For example, you should expect an interest rate that has a higher percentage. Also, the other processing fees may be inflated as well.
That’s why this shouldn’t be regarded as just a simpler solution to get a loan. In this case, just look for the paperwork, as tedious as it may be.