How Do Lenders Assess Whether Loan Repayments Could Cause Financial Hardship?

When you apply for a loan, there is more to the assessment than checking whether money is coming into your bank account.

A lender also needs to consider whether the proposed repayments are likely to remain manageable alongside your essential living expenses and existing financial commitments.

You may hear this described in general terms as a loan hardship assessment, affordability assessment or responsible lending assessment.

Under Australian responsible lending laws, licensed credit providers must make reasonable inquiries about your financial situation, requirements and objectives, and take reasonable steps to verify your financial situation. They must also assess whether the proposed credit contract would be unsuitable for you.

A contract will be unsuitable when, among other circumstances, you are likely to be unable to meet your financial obligations under it or could only do so with substantial hardship.

What Is a Loan Hardship Assessment?

“Loan hardship assessment” is a useful plain-English way of describing the process of considering whether adding a new repayment to your budget could place unreasonable pressure on your finances.

It is not simply a calculation of whether your income is higher than the loan repayment.

A lender may consider what you have left after paying costs such as rent or mortgage repayments, groceries, utilities, transport, existing debts and other necessary expenses.

The assessment also considers whether the credit product meets your stated requirements and objectives.

There is no single affordability formula used by every lender. The inquiries and verification required can depend on matters such as:

• The type and amount of credit.
• The proposed repayment term.
• Your sources of income.
• Your existing financial commitments.
• The information available to the lender.
• Any inconsistencies or circumstances that need clarification.

The outcome should reflect your individual circumstances rather than relying only on a minimum income figure or a general assumption about borrowers.

What Information Do Lenders Consider?

Your Income and How Reliable It Is

A lender may consider how much income you receive, where it comes from and how regularly it is paid.

This could include:

• Employment income.
• Overtime or casual earnings.
• Government benefits received alongside other income.
• Other legal and verifiable income.
• Recent or expected changes to your employment circumstances.

Regular income can be easier to assess than income that changes substantially from one pay period to another.

When your income varies, a lender may need to consider whether your typical or lower-income periods would still allow you to meet the proposed repayments.

Meeting a lender’s minimum income requirement does not guarantee approval. Income is only one part of an affordability and responsible lending assessment.

Essential Living Expenses

A lender also needs a reasonable understanding of the ordinary costs you must continue paying while repaying a loan.

Depending on your circumstances, these may include:

• Rent, mortgage repayments or board.
• Groceries and household supplies.
• Electricity, gas, water and telecommunications.
• Transport, fuel and vehicle expenses.
• Medical and health costs.
• Childcare and education expenses.
• Insurance.
• Financial support for dependants.

The purpose is not to judge every purchase you make.

The aim is to understand whether your proposed loan repayments would leave enough money for your reasonable and necessary living costs.

Existing Debts and Payment Commitments

Your existing financial obligations can make a significant difference to how much room you have in your budget.

A lender may consider commitments such as:

• Personal loan repayments.
• Credit card balances and required payments.
• Car finance.
• Buy now, pay later commitments.
• Existing short-term credit.
• Child support or maintenance payments.
• Other regular contractual commitments.

A repayment that appears manageable on its own may become difficult when it is added to several other obligations.

Providing complete and accurate information about your commitments helps the lender assess your circumstances properly. Leaving out a debt or regular expense may delay the assessment or result in the lender working with incomplete information.

Recent Bank Account Activity

Recent bank account information may also be used to verify details you provide in your application.

Depending on the lender and the application, this information may help confirm:

• Your income and how often it is paid.
• Regular household expenses.
• Existing loan repayments.
• Direct debits and subscriptions.
• Overdrawn account activity.
• Missed or dishonoured payments.
• Spending patterns that materially affect the income available for repayments.

A single unusual transaction will not necessarily determine the outcome of an application.

A lender generally needs to consider your broader financial position and may ask you to explain something when the information is unclear or inconsistent.

The Purpose of the Loan

Affordability is not the only consideration under responsible lending requirements.

A lender must also assess whether the proposed credit contract meets your requirements and objectives.

For example, you may be asked:

• What do you need the money for?
• How much do you actually need?
• Is the proposed loan term appropriate?
• Is the expense personal or business-related?
• Is the borrowing for a one-off cost or ongoing expenses?

A loan may appear affordable based on the numbers but still be unsuitable if it does not meet your stated requirements or objectives.

Your Remaining Financial Buffer

A budget that only just covers a proposed repayment can be more vulnerable to changes in your circumstances.

For that reason, an affordability assessment may also involve considering what remains in your budget after the repayment is included.

This can help account for normal variations in expenses or income, such as a higher electricity bill, additional vehicle costs, medical expenses or reduced casual working hours.

An assessment cannot predict every possible emergency. However, it should consider whether the proposed repayments appear sustainable rather than relying on an unrealistically perfect budget.

How Lenders May Verify Affordability

The exact process varies between credit providers, but the following areas may form part of an affordability assessment.

A lender may ask for more information when figures in an application do not match the information available to it.

That does not automatically mean the application will be declined. It may simply mean further information is needed before an assessment can be completed.

What Could Indicate a Risk of Financial Hardship?

No single factor necessarily proves that a loan would cause financial hardship.

However, a combination of circumstances may indicate that new repayments could be difficult to manage.

Examples can include:

• Essential expenses already using most or all of your income.
• Frequent overdrawn balances.
• Several existing loan repayments.
• Recent missed payments or dishonoured direct debits.
• Income that is expected to end or decrease.
• Relying on further borrowing to meet existing repayments.
• Needing to delay essential food, housing, medical or utility costs.
• Having little or no realistic amount available after ordinary commitments.

An affordability assessment should not rely on an unrealistic assumption that you can simply stop paying necessary living expenses to make room for a loan repayment.

Any proposed reduction in spending should be realistic and consistent with maintaining reasonable living expenses.

What Happens After an Affordability Assessment?

Depending on the application and the information available, a lender may:

• Approve the requested credit when it has been assessed as not unsuitable.
• Ask for further documents or clarification.
• Decline the application.
• Consider a different amount or term when available, with that alternative also assessed appropriately.

Being declined does not necessarily mean you have done anything wrong.

It can simply mean the proposed credit does not fit your current financial circumstances or that there is not enough reliable information to establish that the repayments are affordable.

Approval should never be assumed simply because you have regular employment, meet a minimum income requirement, have borrowed successfully before or have a particular credit score.

How to Prepare for a Loan Affordability Assessment

Providing accurate and complete information can make it easier for a lender to understand your financial position.

Before applying, you may want to:

• Review your recent income and essential living expenses.
• List all current debts and repayments.
• Allow for bills that are paid monthly, quarterly or annually.
• Check that the amount you are considering borrowing reflects the actual expense.
• Consider whether repayments would remain manageable during a lower-income pay period.
• Be prepared to explain any unusual but legitimate transactions if asked.
• Think carefully before submitting several credit applications within a short period.

You should never hide, alter or misrepresent information in a credit application.

An accurate assessment helps both you and the credit provider determine whether the proposed borrowing is appropriate for your circumstances.

How We Assess Repayment Affordability at Sunshine Loans

At Sunshine Loans, we offer unsecured Medium Amount Credit Contracts to eligible Australian consumers.

We assess every application individually. Your application is subject to our eligibility criteria, affordability assessment, responsible lending obligations and approval process.

As part of our current eligibility requirements, you generally need to:

• Be at least 18 years old.
• Receive take-home income of at least $750 per week or $1,500 per fortnight.
• Have your take-home income visible in your bank account information.
• Have income other than government benefits if you receive Centrelink or other benefits.
• Demonstrate that you can manage the proposed repayments without financial hardship.

Meeting these initial eligibility requirements does not guarantee approval.

Our current Medium Amount Credit Contract features include:

Our product is designed for eligible consumers seeking credit for certain personal, non-business expenses, including infrequent or sometimes unexpected costs that cannot reasonably be met from usual disposable income.

Our Target Market Determination excludes borrowing for regular, ongoing ordinary household expenses such as utilities, except in specified circumstances such as accumulated arrears or unusually high costs arising from special circumstances. We also do not offer this product for business purposes.

Before considering an application, we encourage you to review our full eligibility requirements, loan costs and Target Market Determination so that you understand how our product works and whether it may be appropriate for your circumstances.

Consider Alternatives Before Borrowing

Taking out a loan is only one possible way to deal with an expense.

Before borrowing, you may want to consider whether another option could meet your needs without adding a new repayment to your budget.

Depending on your circumstances, alternatives could include:

• Using available savings.
• Asking the service provider whether a payment plan is available.
• Delaying a non-essential purchase.
• Reviewing or cancelling unnecessary subscriptions.
• Checking whether insurance or a warranty covers the expense.
• Asking a utility provider about payment or hardship assistance.
• Speaking with a free financial counsellor.

Considering these options can help you make a more informed decision about whether borrowing is appropriate.

What if You Are Already Struggling With Repayments?

An affordability assessment before a loan starts is different from asking for financial hardship assistance after you have entered into a credit contract.

If you are experiencing repayment difficulties, contact your credit provider as early as possible and explain what has changed.

You may be asked about your current income, essential expenses, the reason for your financial difficulty and what you can realistically afford to pay.

If you already have a loan with us and are having trouble making repayments, you can contact us about financial hardship assistance. This process is separate from applying for new credit.

Free and confidential financial counselling is also available through the National Debt Helpline on 1800 007 007.

Frequently Asked Questions

Is a Credit Score the Main Part of a Loan Hardship Assessment?

No.

A credit score or credit history may provide information relevant to an application, but repayment affordability also depends on factors such as your income, expenses, existing debts and the proposed repayment.

A particular credit score does not automatically mean a new loan is affordable or that an application will be approved.

Do All Lenders Check Bank Statements?

Verification methods vary between credit providers and products.

A lender may review bank account information, income records or other documentation to verify the financial information provided in an application.

The type and amount of information required can depend on your circumstances and the credit product involved.

Can a Lender Decline an Application Because Repayments May Cause Hardship?

Yes.

Under Australian responsible lending obligations, a licensed credit provider must not enter into a credit contract with you if the contract is unsuitable.

This includes circumstances where you are likely to be unable to meet your financial obligations under the contract or could only do so with substantial hardship.

Does Meeting a Lender’s Minimum Income Requirement Guarantee Approval?

No.

A minimum income requirement may form part of a lender’s initial eligibility criteria, but it does not replace an individual responsible lending and affordability assessment.

Other matters such as your expenses, existing commitments, repayment capacity, loan purpose and financial circumstances may also be relevant.

For our loans, meeting our minimum eligibility criteria does not guarantee approval.

Can I Be Approved for a Lower Loan Amount Instead?

Possibly, depending on the credit provider, the products available and your individual circumstances.

A different loan amount or repayment term still needs to be assessed appropriately. Borrowing a smaller amount does not automatically make a credit contract affordable or suitable.

What Should I Do if My Circumstances Change After Approval?

Contact your credit provider as soon as you think you may have difficulty making a repayment.

Explain what has changed and provide an honest picture of what you can currently afford.

If you have a loan with us, you can contact our hardship team to discuss your circumstances. You can also seek free and confidential assistance from a financial counsellor through the National Debt Helpline.

Review Affordability Before Applying

At Sunshine Loans, we believe it is important that you understand both the cost of borrowing and the effect that repayments could have on your existing budget.

Before deciding whether to borrow, review your income, essential expenses, current commitments and available alternatives.

You can also review our FAQs, eligibility requirements, loan costs and Target Market Determination to better understand how our Medium Amount Credit Contract works.

If you believe our loan may be appropriate for your circumstances, review our eligibility requirements before applying. Every application is subject to individual assessment and approval, and you should only consider borrowing an amount you believe you can repay without financial hardship.

The information provided in this blog is for general informational purposes only and does not constitute financial advice. It is not tailored to the specific circumstances of any individual. Before acting on the information, you should consider whether it is appropriate for you, having regard to your objectives, financial situation and needs.