If you’ve ever taken out or applied for a home loan, then it’s highly likely that you would have encountered the expression ‘borrowing capacity’. While extremely prevalent in the home mortgage market, borrowing capacity is also significant when applying for a wide range of personal loans for different types of goods. If you are considering applying for finance on caravans, it can be important to understand how borrowing capacity can impact caravan loans and what actions a loan applicant can do to improve individual borrowing capacity to achieve a cheaper caravan loan.
Borrowing Capacity: Explainer
By definition, borrowing capacity is a specific amount of money that an individual is approved to borrow from a lender. While discussed widely in the home loan market, it is one of the assessment factors which are considered by lenders in approving all types of loans including caravan finance.
In the home mortgage market, lenders including some which we are accredited with for caravan finance, provide calculators for individuals to assess their borrowing capacity prior to application. Borrowing capacity varies for different individuals as it is assessed on individual financial circumstances.
By knowing the capacity ahead of time, buyers can adjust their purchase scope to suit the amount they are more likely to be approved to borrow. It is not essential to know individual borrowing capacity prior to applying for a loan. As a Licensed Credit Provider, Jade Caravan Finance adheres to the Responsible Lending Guidelines as established under Australian Consumer Laws. These include not offering a loan to an individual that is inappropriate for that person.
Lenders assess a range of aspects of an individual’s financial circumstances to establish a figure for their borrowing capacity. This includes their income, their debts, current and recurring expenses and assets.
The credit profile and credit score is a vital part of all loan approvals processes but this differs from borrowing capacity. The credit score reflects the risk of the borrower repaying the loan as it is a record of payment history including loan and payment defaults and other issues.
Impact on Caravan Finance Rates
As mentioned earlier, the borrowing capacity of a loan applicant forms an integral part of assessing all types of loans. The lender will assess if they consider the applicant has the capacity to repay the amount of the caravan loan being requested. This is especially crucial when considering low rate caravan loans, as the terms might be more stringent.
As no deposit finance is available on our caravan loans, buyers seeking this option will be seeking to have the entire purchase price of the caravan including in the loan amount. Where the lender does not assess the borrowing capacity to be congruous with the loan application, a number of outcomes are possible:-
- The caravan finance application for that loan amount may be rejected. If this is the sole basis for the application being rejected, applicants can review the amount being requested. This may involve paying a deposit to the seller and as such not requesting no deposit finance or purchasing a lower-priced RV.
- The lender themselves may request that the finance total be reduced.
- The lender may request additional security as well as the caravan as a guarantee against the finance.
- Where the risk assessment is judged as high, a higher interest rate may be attached to the caravan loan.
When working with Jade, your consultant will be liaising with the lenders and negotiating to achieve the optimum outcome for your finance.
Improving Borrowing Capacity and Achieving Loan Approval
Most individuals will have a pretty good idea of what they can afford in potential caravan loan repayments even before making an application. They know how much spare they have each week or month after their essential needs and expenses are met. The Governor of the Reserve Bank, Philip Lowe, has mentioned in a number of statements recently that many household balance sheets are in good shape following extended pandemic lockdowns. A reference to the monies save by not being able to get out and spend on many discretionary items.
But an individual’s concept of their personal ‘affordability’ may differ from a lender assessment. Prior to applying for caravan finance, individuals can take steps and make changes to their financial status in an effort to improve the borrowing capacity and hence achieve a better loan.
- Clearing other loans and any credit card debts can improve that side of the balance sheet. With less regular commitments, the capacity can be increased.
- Cutting back on some spending may also assist. This may be for luxury or non-essential goods and services. A new spending pattern would need to be established over a period which meets the lender’s assessment guidelines.
- The income side of the balance sheet may be more difficult to improve where the individual is employed on a fixed wage or salary and where there is no forecast wage increase on the horizon.
- Address any issues on a credit score.
- And of course, as mentioned previously, opting for a cheaper caravan can be something to consider. Caravans cover a wide spectrum of types and price ranges with models to suit most people and budgets.
By engaging Jade Caravan Finance as your lender, we can assist with the application process, select the lender that best meets the requirements and negotiate for an optimum outcome for both our customer and our lender.
Call 1300 000 003 to discuss your caravan finance requirements with a Jade Caravan Finance consultant.
DISCLAIMER: THE DETAILS AND INFORMATION IN THIS CONTENT ARE PREPARED AND PRESENTED PURELY FOR INFORMATION AND NOT INTENDED IN ANY WAY AS THE SOLE SOURCE OF FINANCIAL ADVICE FOR CARAVAN PURCHASING. IF ADDITIONAL FINANCIAL ADVICE IS REQUIRED, READERS SHOULD REFER TO A FINANCIAL ADVISOR. NO LIABILITY IS ACCEPTED FOR ANY ERRORS, PRODUCT DESCRIPTION VARIATIONS, OR OTHER MISREPRESENTATIONS OF INFORMATION AS PRESENTED.