5 Mistakes to Avoid When Applying for a Loan

5 Mistakes to Avoid When Applying for a Loan in NZ

Most loan applications that run into problems do so for the same handful of reasons. They are not complicated issues, but they are easy to overlook, especially when the focus is on the vehicle or the purchase rather than the application itself.

This guide covers the five most common mistakes that affect personal loans and car loan applications in New Zealand, and what to do differently.

At a glance: The five most common mistakes

Mistake 1: Applying to multiple lenders at the same time

When a lender receives a loan application, they conduct a credit enquiry. That enquiry is recorded on your credit file - and it is visible to every other lender who checks your file from that point on.

Applying to several lenders at the same time in the hope of improving your chances has the opposite effect. Multiple enquiries in a short period signal to lenders that you have been declined elsewhere, or that you are under financial pressure. It can affect your credit score and make subsequent applications harder.

The way to avoid this is to be selective about where you apply. If you are unsure which lender is most likely to approve your application, a licensed financial adviser who works as a lending broker can assess your situation first and match you to appropriate lenders before any application is submitted, reducing the number of enquiries on your file.

Mistake 2: Providing incomplete or inconsistent information

Lenders in New Zealand verify information from a variety of sources, including what you tell them. Under the CCCFA, they are required to make reasonable enquiries into your financial situation, including your income and expenses, and that means checking the figures you provide against your bank statements, payslips, and other documentation.

Applications that run into problems often do so because the numbers simply do not add up based on the information provided. Income stated in the application does not match what appears in the bank statements. Living expenses are understated. A debt that is not disclosed shows up in the credit check. Each of these creates a query that slows the assessment and could lead to a decline.

The most straightforward way to avoid this is to have your documents ready before you apply, to ensure the information you provide is factual in nature and a true account, and to check that the figures you are providing are consistent with what a lender will see when they verify your information. Our guide to why lenders ask for bank statements explains what they are looking for and how they interpret account conduct.

Mistake 3: Not knowing what Is on your credit file

Your credit file contains a record of your credit history, applications, accounts, repayment conduct, defaults, and court judgements. Lenders use it as part of their assessment.

Many people apply for a loan without having checked their credit file first. The problem is that files can contain errors, accounts that were closed but still show as active, forgotten payments in arrears, defaults that were settled but not updated, or enquiries from lenders you do not recognise. They can also contain accurate information that may have forgotten about but that a lender will find significant.

In New Zealand, you are entitled to request a free copy of your credit report from the main credit reporting agencies. Checking it before you apply gives you the opportunity to identify errors and query them, or to understand how your file will look to a lender. Our guide to what is on your credit file and why it matters covers the key things to look for.

Mistake 4: Applying for more than your actual borrowing capacity

Under the CCCFA, lenders must assess whether a loan is affordable based on your current income and expenses. If you apply for an amount that does not pass that assessment, the application will be declined.

The mistake is applying based on what you want to borrow rather than what you are likely to be able to borrow given your actual financial position. A lender looks at your income after tax, your verified living expenses, and your existing commitments. What is left over is what is available to service a new loan repayment.

Using the Nomu loan calculator before you apply gives you a realistic sense of what a repayment on a given amount would look like, and whether it is likely to be serviceable within your income. Our guide to how much you can borrow for a personal loan covers the factors lenders use in that assessment.

Mistake 5: Comparing repayments instead of total cost

A lower weekly repayment is not the same as a lower-cost loan. Two loans with the same borrowing amount can have very different total costs depending on the interest rate and term.

A loan at a higher rate over a longer term can produce a similar or lower weekly repayment compared to a loan at a lower rate over a shorter term, but the total amount repayable over the full term could be meaningfully higher. If you are comparing loan offers based only on the repayment amount, you may be choosing the more expensive option without realising it.

The clearest comparison is total repayable, the full amount you will pay back including interest and fees, over the entire loan term. Lenders are required to disclose this under the CCCFA, alongside any feeds and you should use it as the primary figure when comparing options.

How a broker can help

A licensed financial adviser who operates as a broker can help avoid several of these mistakes before an application is submitted. They assess your financial position, make reasonable enquiries where there are gaps in the information required, identify which lenders are likely to be suitable, and submit your application to those lenders on your behalf, reducing the number of enquiries on your file and possibly improving the quality of the match.

Nomu Finance is a licensed Financial Advice Provider (FAP licence FSP1011169). We work with a panel of New Zealand lenders across personal loans, vehicle finance, and debt consolidation. If you would like to understand your options before applying, you are welcome to get in touch.

If you are already under financial pressure

If your interest in a loan is driven by difficulty meeting existing commitments, it is worth speaking to a financial mentor before applying for additional credit. MoneyTalks is a free financial helpline, they offer confidential budgeting support and guidance. You can reach them on 0800 345 123 or at moneytalks.co.nz.