There are times in life that you may not have access to the documentation and records usually needed to easily secure a debt consolidation loan. Maybe you’re fresh out of high school or university with little financial history, or you’re self-employed or freelance with no weekly pay slips.
This is where a low-doc loan can fit the bill. Potentially, all the funds without the lengthy loan application process and paperwork.
What’s the catch?
Borrowing money costs money, and the cost of a loan all comes down to the level of risk. A lender weighs up a borrower's risk by looking at their employment history and credit score. The more creditworthy background they can obtain about your financial history, the better.
So to make up for not having a long history of employment, or a high credit score, Lenders need to change a little more to make it worth their while. Lenders consider low-doc debt consolidation loans to have more risk than the average secured or unsecured debt consolidation loan, so they’ll offer higher interest rates to offset that risk.
In the longer term, your credit score will benefit from having an unblemished debt consolidation loan repayment record, so the next time you apply for a loan you’ll appear to be a lower risk candidate. So there is a potential silver lining.
Paperwork or no paperwork
The amount of documentation required for a low-doc debt consolidation loan is, as the name suggests, minimal. You won’t need to provide as many pay slips and tax returns as standard personal loans. This means the process to apply is far simpler and less time consuming.
Banks, credit unions and online loan providers will look mainly at your credit history or how long you’ve been operating as a business owner.
If you have an asset such as a home or car or valuable items to mitigate the risk and bring the interest rate down you might choose to apply for a secured debt consolidation loan. Secured loans are usually not considered ‘low-doc’ as the process will involve a more complex application and more paperwork, as you’ll need to provide details of the value of the asset.
Who offers these loans?
Most money-lenders such as banks, credit unions and online loan providers have a low-doc debt consolidation loan option. Some, however, offer an alt-doc loan, which requires more documentation, but the documentation is less traditional.
Before you start applying, do your research and compare the different loans on offer. You can compare loans with the Plenti comparison calculator including comparison rates, interest rates, application fee and loan term. Also enquire about exit fees should you wish to pay out your loan early and default and missed payment fees.
The comparison rate will show one figure that encompasses the entire cost of the loan you are researching.
Remember Plenti’s lending market is live, so it’s good to check our live rates often as they can vary depending on our lending markets.
The good and the not so good
Before we get over excited at the ease of securing a low-doc debt consolidation loan, remember these loans are usually for those who don’t meet the eligibility requirements of a lower rate debt consolidation loan.
Borrowing money with a low-doc debt consolidation loan may be an easier option but think of them as a last resort if you can’t get approval for other debt consolidation loans. It’s important to be confident in your ability to make all your repayments on time, so when considering your loan amount, less is really more in the long run to prevent undue stress and more debt.
Interest rates on low-doc debt consolidation loans will indeed be higher while flexibility and features offered will be less. You’ll also be paying interest on every repayment, plus any lender fees involved.
If you’re a freelancer or work in seasonal employment or have a seasonal business it’s worth your while to seek out redraw facilities and lines of credit. This means that you can make extra repayments when cash is flowing and should you need to, you can then draw against that extra money if cash flow slows.
Can I spend the money how I want?
Within reason. For an unsecured low-doc debt consolidation loan you should be using it for those purposes, and not putting it towards something new. You can however choose which upcoming bills, existing loans or debt you do consolidate, without having to consult your loan provider on the age or model you prefer.
If it is a secured low-doc loan, you will need to adhere to the stricter terms of the loan.
What will it cost me?
The answer will always come down to the interest rate and the fees. Which is where comparison sites matter, try the Plenti loan comparison link to do your research.
Remember when comparing low-doc loans that the advertised rate is the rate without fees and the comparison rate includes all fees and charges. The comparison rate will always be the better rate to compare.
What will I need to apply?
Now you’ve settled on the provider you want to apply with, you’ll need to ensure you have the information they need to approve it.
Obviously, it will be less documentation than the usual personal loan which requires two years of personal and business taxes, profit and loss financial statements, ATO assessments and more.
For a low-doc debt consolidation loan you’re more likely to just need your ABN or ACN certification, 12 month BAS statement, and identity certification. Depending on the lender you may need to provide less or more. Either way a letter from your accountant would be a good idea.
If you’re self-employed then the loan provider will look at how long you’ve been in business and what your overall income is via your BAS statements.
How much can I borrow?
As a rule of low-doc borrowing, you should be able to apply for anything from $5000 to $50,000 depending on your circumstances.
Can I get a low-doc car loan if I have bad credit?
Credit matters. Always. Of course, there are ways to improve your credit score, and one is to repay your car loan on time every time. However, if you have a less than stellar credit rating there are money lenders that will support you, so do your research as each lender’s credit policies will apply.
If you’re not sure of your credit rating then you can check your credit report for free via a registered agency such as Equifax, CheckYourCredit and Experian.