Setting the Landscape of Personal Loan Space Amid COVID Crisis: Financial Lenders Vs Borrowers

Summary

• Personal loan market witnessed dip in demand owing to faltering consumer confidence and economic uncertainty in the face of COVID 19 crisis.
• People may opt for a personal loan in the near future to meet high-priority expenses.
• Consumer lending players can stay ahead of the curve in flattening the ‘loan default and credit losses curve’ at the back of critical game playing in the space.
• Borrowers can improve loan approval chances in pandemic era, adopting strategic measures to boost their credit score.

No wonder, the ‘Black Swan’ COVID-19 pandemic has costed businesses and consumers a great deal of time and money across the world. From sluggish economies to shredding financial markets, Global Virus Crisis has given everyone a pain in the neck for financial lenders as well as borrowers.

Despite business continuity plans, consumer lending institutions have been grappling to deal with changed consumer sentiments and potential credit losses:

1. Threat to Cash Positioning: With mounting loan default risks and mortgage deferral requests amid significant job losses and squeezed incomes, the consumer finance companies are exposed to serious disruption to their cash flows.
2. Financial Impact of Growing Re-Finance interest: Besides, a sharp rise in home loan refinancing applications to lock in low-interest rates is directing serious blow to the strength of balance sheets of financial lenders. While applications for fresh home loans are plunging in Australia, a sudden boost has been noticed in refinancing applications in response to COVID-19 outbreak.
3. Capital Buffer Maintenance: In addition, maintaining adequate capital buffer and liquidity to withstand the crisis is of utmost importance for such companies.

Though Australia’s financial system is believed to be well capitalized to cope with worst economic conditions, consumer finance companies may need to take additional strategic steps:

1. Financial Cushioning: They need to create additional capital buffers via capital raising to breeze through potential downturn.
2. Strategic shift/designing of Business Models: While dealing with challenges, financial lenders need to adopt robust business models to up their game in the competitive landscape. While a paradigm shift has been spotted in consumers’ preferences towards digital transactions and e-commerce, financial players may target growth driven strategic initiatives focused at debit card, credit card and BNPL (Buy Now, Pay Later) segments.
3. Loss Minimisation and Client Equation Balance: Besides, developing loss mitigation strategies and effective customer relationship plans may aid in the survival of consumer finance players.

At the time when other advanced economies are still struggling to control the spread of deadly virus, Australia has demonstrated exceptional success in containing it. We expect consumer lending players to stay ahead of the curve in flattening the ‘loan default and credit losses curve’ at the back of critical game playing in the space, with improving consumer sentiments and economy reopening are bolstering prospects of the same.

While personal loans are believed to be a preferred credit option during period of unexpected financial emergencies, people tend to make some frequent mistakes while taking a loan, as discussed below:

1. Insufficient Research on Available Options:
   • As features and benefits associated with personal loans differ across lending institutions, it is unwise to choose a lender without shopping around and exploring available options and rates available, along with procedures and approval duration involved.
   • For instance, people might end up settling with instant approval personal loans from a lender that charges high interest rates than its competitors, if thorough research is not undertaken.
2. Neglecting Credit Rating:
   • Reviewing your credit report and repayment worthiness before applying for a personal loan is instrumental to get an idea of your financial positioning and how financial institutions would consider your application.
   • A good credit score can offer you greater negotiating power for interest rates.
3. Applying to Multiple Lenders at the Same Time:
   • At times when individuals are in dire need of money, they end up applying for personal loans with multiple lenders, which usually gets disclosed in enquiry process undertaken before loan approval.
   • In such cases, the credit score of ‘credit-hungry borrower’ gets reduced and chances of a spike in interest rates rise.
4. Not Reading the Fine Print:
   • Prior to signing a personal loan agreement, a borrower must read the fine print and understand various terms and conditions of the loan.
   • While T&Cs can be complex and full of complicated jargon, its essential that you read the fine print to avoid missing out seemingly minor details in your contract while applying for a financial product from the lender.
5. Under-Reporting Existing Debts:
   • Another key mistake borrower often commits while applying for a loan is under-reporting existing debts to qualify for a higher loan amount.
   • However, such willful misinformation can erode your trustworthiness, lower your credit score and result in rejection of your personal loan application.
6. Borrowing Beyond Your Repayment Capacity:
   • Before borrowing a sum, it is imperative to consider your repayment capability by evaluating your ability to pay the EMIs regularly.
   • Not knowing your repayment capacity may lead you to opt for an unnecessary long tenure with higher interest payout or a shorter tenure with higher EMIs.

While personal loans can bail out an individual out of unanticipated financial emergencies like coronavirus pandemic, several mortgage lenders have raised their minimum credit score and stepped up income verification processes amidst a potential surge in defaults due to COVID-19. Having said that, here are the few tips that can help boost loan approval chances in pandemic era:

1. Boost Credit Score:
   • As credit score is one of the first filters factored in by lenders to evaluate your credit worthiness, create or improve your credit score before applying for a loan. In the short term, the best step consumers can take to lift their credit scores is to pay off debts.
   • Those seeking mortgage loan with low credit score can approach a conventional bank or try checking with a mortgage broker or an online lender.
2. Add a Co-Applicant with Good Credit Profile:
   • Borrower can opt for a joint loan with a co-applicant with strong credit profile to reduce the credit risk.
   • If the co-applicant has a stable income, satisfactory repayment capacity and a good credit score, chances of loan approval increase considerably.
3. Be Quick in Submitting Documents:
   • As low interest rates have bolstered demand for mortgage volumes, borrowers seeking mortgage loans need to be at beck and call in organizing their income and asset information.
   • The quick submission of required documents is likely to foster the loan approval process.
4. Contact Creditor in case of Job Loss:
   • In the event of a job loss, income reduction, or any disruption that may mean that you miss payments, you can contact your creditors immediately, preferably before your first missed payment.
   • Having said that, your highest priorities should be applying for unemployment benefit and cutting unnecessary expenses to preserve cash.