Finance explained: “Low doc” or “no doc” loans
If you’re self-employed and looking for finance like a car loan, personal loan or mortgage, you’ve probably been close to tearing your hair out. People who are self-employed or small business owners find it quite difficult to apply and get approval for big loan products compared to people who work full-time at a company. The solution? What’s known as “low doc” or “no doc” loans.
“Low/no doc” defined
Low doc and no doc are short for “low documentation” and “no documentation” respectively. The documentation refers to the financial statements that you usually have to produce when applying for a loan.
These documents may include:
• Payslips from your regular employment
• Financial statements such as bank statements
• Personal income tax returns
• Proof of bill payment
• Residential history
Some lenders may vary in what they need to assess your application. Lenders, as we’ve explained on the blog before, are cautious about who they lend to. They want to make sure all the customers that walk through their door or click “submit” are as low risks as possible. That’s why they ask for the “full doc” (full documentation) when deciding whether to lend to you or not.
The self-employed “curse”
The self-employed, small business owner or full-time investor’s income is less certain than someone employed full time. (Though, it can be argued that in an economy that innovates so fast, who knows what’s certain any more.)
Many self-employed or small businesses re-invest their profits back into the business, which makes it even harder for them to demonstrate they are making a definite income. Others are full-time investors who use these loans to buy financial assets. As a result, their risk is much higher.
What the self-employed may need to provide as proof they can pay back the loan are:
• Business Activity Statements (BAS)
• Accountant’s letter
• Bank statements
• Clean credit history
• Proof that you’ve held your Australian Business Number (ABN) for over 12 months
In recent years, Low Doc loans have become more favourable in terms of interest rates. That said, banks are still more reluctant to lend out to people in low doc situations. Also, low doc loans have a limit to what percentage the lender will finance. This means self-employed people will have to save up more than others for their house or car’s deposit, usually 20%.
Low doc vs no doc
Low doc asks you to provide some proof of income, although not as much as a mainstream loan. No doc lenders don’t ask you to provide any proof of income when applying for finance. Instead, you are asked to sign a declaration saying you can make the repayments required. However, these loans tend not to be regulated under the National Consumer Credit Protection Act and leave people who aren’t financially savvy quite vulnerable. Many people who have no documentation are recent arrivals to Australia from overseas and have no credit history.
In the car loan world, sometimes No Doc loans are also referred to as “No Credit Check” loans. These loans usually have longer terms and higher interest rates. Though they can be a stepping stone to better credit, it usually means you’ll be paying much more than standard car loans.
Low doc loans aren’t for everyone
Low doc loans are almost specifically designed for self-employed people and those who run small businesses. Low doc loans aren’t for everyone. If you can apply for a mainstream car loan or mortgage, it’s probably better to do so. We hope that this post has cleared up some of the terms so you can make a better informed decision about loans in general.