How Bank Statements Affect Your Loan Qualification
Got rejected on your loan application? It could be because of your poor bank account statements.
A bank statement is a periodic record of all the transactions made in your bank account, including deposits, withdrawals, cash transfers and debit card payments. It also contains other financial information, such as your cash balance, individual cheques paid, interest earned, and bank service fees and penalties.
This record is a required document in the loan application process to help lenders assess your banking stability and repayment capability. It does not only show your financial position but also reflects your spending habits and how you manage your cash flow.
What Lenders Look For in Your Bank Statement
Lenders typically require a copy of your bank statements from the last 3 months when evaluating your loan application to check the following:
A positive cash balance means that you have available money in your bank account. It tells lenders that you’re managing your cash flow well and you’re likely a responsible borrower who repays as promised. On the other hand, a negative cash balance suggests that you can’t handle your finances properly.
The ideal amount of cash balance required by lenders usually depends on the loan amount you requested.
- Anything less than $10k average daily balance maintained is considered low.
- Generally, the higher your balance, the better your rate.
- If you want to apply for a bigger loan amount, you need to have a higher cash balance.
Regular deposits to your bank account suggest that you have a steady source of income and are likely to make on-time monthly repayments. If you own a business, lenders are likely to deduce that it is operating profitably and that there's a steady stream of revenues from continuous sales transactions. However, if the latest deposit was made months ago, they would suspect that your source of income is not sustainable and you might struggle with repayments in the future.
- Irregular large deposits and one or two big deposits right before applying for a loan are questionable. You would have to explain where these funds come from so that the lenders would not suspect that the money you claim to have isn’t actually yours.
- Lenders could also disregard lump-sum deposits and would only consider the remainder of your income as a “seasoned asset” in the assessment of your loan application.
Avoid making huge withdrawals weeks before applying for a loan. Frequent withdrawals, especially of the same amount from your bank account, may suggest that you are paying an undisclosed loan, credit card debt or any other transaction that requires you to make regular payments.
- If you need to withdraw money, replenish it immediately with deposits.
- Avoid depleting your cash balance to an unmanageable level when taking out funds.
An overdraft is a deficit in your bank account as a result of using money more than your account holds. It can be caused by oversight when you write cheques for funds that are not available.
- This record in your bank statement is typically a red flag for lenders.
- It makes them think that you are struggling to manage your finances and you might have a hard time paying back your loan on time.
- If you have an overdraft in your bank statement, you would need to explain how it happened and provide any supporting documentation if required.
Your bank statement is just one of the many factors that lenders look into when evaluating your loan application, but it can tell a lot about you and your financial circumstance. It is wise to maintain a clean bank statement with a positive cash balance, regular deposits and no overdraft several months prior to your loan application so that you’re likely to get the lender’s approval.
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