What Are Low Doc Loans and How Can You Get One?
Low documentation loans, also known as alternative documentation loans, are a type of financing for people who do not have extensive financial statements, like payslips, personal or business tax returns and other income information that standard consumer loans typically require. These loans allow those who do not have or can only provide little documented information about their employment, income and assets.
People get low doc financing to buy a new car, home or business equipment. It can also be used to fund a business project.
Who Use Low Doc Loans?
Low doc financing benefit independent contractors, business owners who are just starting up and cannot show a past of consistent business profit, contractual and seasonal workers, retirees with investment income, job newbies with a history of low wages or no history at all, and others who have an irregular income or in other nontraditional financial situations.
These people generally have:
- No up-to-date tax returns or have not filed a tax return for the previous year
- An increased income since their last tax return
- Complex company structure or business that’s difficult to compartmentalise
- Distributed their income to family members in the form of a trust
- Large deductions such as depreciation
- Privacy needs and want to keep their real income level to themselves
- Difficulty finding and organising the required documentation
- Income or assets that are not documented in a transparent, auditable and lender-approved way
Those who own big businesses but with larger losses than gains, those who are newly immigrated into the country and those who are unemployed and do not meet the strict requirements of traditional lenders can also apply for a low doc financing.
Advantages of a Low Doc Car Loan
Aside from the obvious advantage of getting funds for personal or business projects with a little documentation, a low doc loan also provides several other benefits.
1. You don’t have to spend too much time on document preparation.
A low doc financing usually only requires your personal or business information and the latest bank statements from the last 6 months or 1 year. Thus, you won’t have to go through the trouble of requesting for copies of your various other financial statements and other supporting documents. With less documentation to gather and organise, you can process your application fast and get your funds in a short period of time.
2. You can maintain the confidentiality of your financial records.
There is no need for you to submit your income tax returns and other financial records to the lender. This way, you can avoid exposing your overall financial statements to people you don’t really know and subjecting your financial to scrutiny. All you have to do is prove that you can afford to pay back your loan of the agreed time frame. Your good credit score and positive bank statements can take care of this.
3. You can get the funds fast.
With little documentation requirements, the processing of your loan application is fast and straightforward. It won’t take you a few days to get the funds you need. You also won’t need to prove your income hard. The simple underwriting process involves the lender reviewing your credit history and checking the required documents. If they believe that you will repay the loan within the agreed period based on your creditworthiness and latest income statements, they will grant you the money immediately.
4. You can build your credit.
By paying your monthly dues on time and avoiding delinquent payments, your credit score will further improve. This allows you to get more financing in the future with low interest payments and more favourable terms. As your creditworthiness improves so is your chances of approval on future borrowings.
What Are the Requirements of Low Doc Loan?
A low doc loan requires minimum documentation. However, these documents must prove that the borrower has a source of income that can support their loan repayments. Following the introduction of the national consumer credit regulations in 2009, the requirements for low doc loans have been changed from what used to be a “just minimal documentation” to what should pass the lender’s loan suitability and credit assessment criteria.
Under the National Consumer Credit Protection Act (NCCP) Act, your lender is required to conduct an income verification process before they can approve your loan.
In lieu of income tax returns recent payslips, you must submit all documents that prove your financial capacity to pay the loan. These include:
- Old tax returns
- Evidence of ABN registration for a specified period of time (depending on the lender)
- Evidence of GST registration for a specified period of time (depending on the lender)
- A declaration of financial position plus one of the following:
- Bank statements for a specified period of time that shows a high turnover
- Business Activity Statements (BAS) for a specified period of time (depending on the lender)
- An accountants letter that verifies your income
As much as possible, provide only the documents that are requested by the lender. Submitting documents that are not asked from you may result in them assessing you further and asking for full financial statements and tax returns.
2. Good Credit Score
If you have a good or high credit score, your lender may be willing to settle for less financial information. Ideally, you must have a credit score of 720 or above to get the lender’s nod.
A high credit score is equivalent to high creditworthiness. You can easily get loans because your credit profile says that you have been a responsible borrower in the past and you are likely to repay the loan for which you are currently applying.
3. Down Payment
The bigger down payment you provide, the lesser the risk for your lender. The standard down payment is around 20% of your total loan, but it’s best to increase it by around 40% if you have the money.
Don’t worry. You won’t lose that money. Aside from serving as proof that you intend to repay your loan, the total amount you provide as down payment will help lower the amount you owe each month.
Collateral secures your loan. For the lender, it provides assurance that they won’t lose their money in case you run away from your loan obligation. For you, it helps get the funds more easily. Sometimes, it even helps you obtain a large amount of money at a low interest rate. If you provide adequate assets as collateral, the lender may be more lenient about your income.
Is a Low Doc Loan Right For You?
Before getting a low doc loan, take the time to consider your own needs and situation. Your lender can only assess your capacity to repay the loan based on the documents you provide. Thus, it’s you who can really determine your ability to be able to make the repayments.
Remember that a low doc loan has a higher interest rate than standard consumer loans. The minimal documentation you provide means that the assessment of your creditworthiness is limited. Thus, granting you the money is a high risk for your lender. To compensate for this risk, your loan’s interest rate will be high. Also, if you default on the loan, the lender will repossess your collateral.
You should also review the terms of your loan so you know where you stand. Are you allowed to make a lump-sum payment or make additional repayments if your business is earning more? Will you be charged if you complete your loan obligation earlier than the agreed term? All these loan conditions and restrictions can affect your repayment strategy.
To get a rough figure on your monthly loan obligations and how much you can really afford to borrow, use our loan calculators.
Positive Lending Solutions offers low doc car loans and other financing types for all Aussies with limited documentation to prove income level. To get a clearer picture of what your low doc finance repayments, call us on 1300 722 210 or fill out our Quick Quote form.