How often do you have extra money in your account just before payday? For many people, the answer is never!
A little-known fact is that some lenders pay attention to the fluctuations in your bank balance.
This can provide important clues into your level of financial discipline and your capacity to take on additional debt, like a car loan.
In this article, we’ll discuss the importance of disposable income and introduce you to the concept of account balance depletion.
Why Lenders Look at Your Bank Balance
A car loan is a significant financial commitment and repayments are usually in the hundreds of dollars per month.
When assessing an application for auto finance, the lender must make a judgment on whether you have the capacity to make these repayments.
If you have surplus funds at the end of every pay cycle, then this can be a big tick against your name.
However, keeping a full car payment in your account at all times is not a prerequisite for loan approval.
As always, there are many variables that a lender could look at ,and it differs from lender to lender, including:
- Account depletion on payday
- Account depletion over time
- Minimum balance through a pay cycle
- Balance at the end of a pay cycle
This is why it is important to use a broker when applying for a car loan. They will be able to assess your balance and place you with the lender most likely to approve your loan.
You can get in touch below.
What is Bank Account Depletion
Bank account depletion is essentially how fast you spend your money the day you get paid.
Consider the following two customer examples who are both applying for a car loan where the repayments would be $300 a month, or $75 a week.
Both applicants earn a weekly salary of $1,500 after tax.
Customer 1
Regular weekly expenses:
- Rent: $400
- Food: $150
- Utilities: $75
- Transport: $50
- Credit Card Repayment: $250
The weekly expenses look well handled with $575 if leftover funds for savings and recreation.
However, he borrowed $200 from a mate last week as he was short. So he pays that back on payday.
It’s Thursday night, and there is a Thirsty Thursdays happy hour just near where he works. He hangs around after happy hour. Pints are $16 each these days, and a steak costs a ton.
He quickly drops another $200.
Then on the way to work the next day, he punctures a tyre. There goes another $100 to replace it.
We are now less than 36 hours since he was paid, and the account balance has just $75 left. It is not even the weekend yet!
Customer 2
Same regular weekly expenses but no Credit Card debt – he saves this money instead:
- Rent: $400
- Food: $150
- Utilities: $75
- Transport: $50
- Savings: $250
What happens to the remaining $575? Well, Thursday has been a hard slog, so a good home-cooked meal with a beer while watching the footy will do.
24 hours later, the remaining account balance is untouched.
The weekend comes, and he likes to go on a run in the mornings in a park. A nice free activity.
Lunch at the pub with some mates and a couple of beers. $100 gone, but home at a respectable time to watch the rest of Super Saturday on TV.
Sunday is a lazy day, cleaning, reading, and shopping for the week. Still $475 in that account by the end of the weekend.
The only thing not accounted for is another $75 to feed the coffee addiction before the next payday on Thursday.
Still over $400 left.
Who Would You Rather Lend Money to?
Customer 2 has more than enough money left in his account at the end of the week to make the car repayment.
His saving habit may also fund a deposit to reduce the size of the car loan.
All strong signals to the lender that he is a good credit risk.
Customer 1 has burned through most of his money in less than a day!
On paper, it appears as though he can afford the repayments. But the reality of his financial behaviour shows a different reality.
This is why lenders consider account depletion.
Managing Your Bank Account Balance
Before applying for a car loan, it is important to manage the pace of account depletion.
While Customer 2 looks to have a handle on his finances, you’ll notice that no tyres blew out, or other unexpected expenses popped up.
Next week, he may not be so lucky. Life happens, and we all have to be prepared for it.
Perhaps Customer 1 is more relatable.
So what could he have done to slow the account depletion on his account while preserving the lifestyle he chooses?
Consider the following steps.
- Instead of Thirsty Thursdays, a Friday or Saturday night happy hour would have delayed that expense.
- He could have spent less at the pub. $100-$150 can still be a decent night out.
- Repay the friend on Tuesday (assuming he is ok with that).
Three very small changes and we have achieved account preservation in that first 24 hours and a healthy bank balance for six days after payday.
We have also created a little extra wiggle room in the budget for the weekend and other expenses.
This is just an example of course, but it is to demonstrate that some proactive thought into spreading your expenses out over the course of your pay cycle can remove a negative factor from a car loan application.
Even if you end up spending the same overall.
Conclusion
A side effect of this proactive account balance management is that you will strengthen your financial muscle and the ability to have money in your account and not spend it.
Only good things will come from developing this ability.
Even if you identify with Customer 1 more, there is a pathway to get closer to Customer 2, without it impacting your lifestyle too much.
