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Getting a Loan on Disability Benefits?
January 8, 2021● 4 minute read●
Disability benefits from Centrelink or National Disability Insurance Scheme might just be good enough to cover your day-to-day expenses. Most times you have to work with this income on a tight budget. This doesn’t mean you shouldn’t be able to afford a car or qualify for a car loan. While it might seem difficult, it’s not far from possible if you do the right things. So how do you get a loan while on disability benefits? Before you take steps to getting a loan on disability benefits, you need to first understand why it may be difficult.
Why is it more difficult to get a loan on disability income?
This has more to do with the structure of disability benefits. Most lenders tend to favour people with a high income. Disability benefits are mainly to cater for living expenses so you’ll need to prove that you can afford the loan repayments. It’s also riskier for lenders because they can’t garnish your wages. Wage garnishment is a legal process that allows lenders to deduct payments directly from your debtor’s account. This is legally allowed with other sources of income, but disability benefits cannot be garnished. If the lender has nothing to hold you own as a form of security, your loan application would likely get denied.
How to get a loan on disability benefits
Have a good credit score
Your credit history is one of the major determinants of your loan approval. Lenders take this very seriously because it shows if you’re a risky and non-trustworthy lender. Your credit history will reflect your past deals with other lenders and show if you’ve been making due payments. You’re more likely to get a loan with a good credit score as it shows that you can be trusted. Lenders like to reduce their risk as much as possible while making profit. You can also negotiate a better deal with good interest rates if you have a good credit score.
However, your loan application is likely to be rejected if you have a bad credit score. Lenders would not trust you so much since you have little or no history of paying bills on time. You can also file for a free credit report from the credit bureau once in a year and carefully scrutinize for any mistakes that you want to be corrected. It is important that you do all these before meeting with the lender.
A bad credit score is not the end of the road. You can work on improving this by making prompt bill payments. You can also get a credit card and build a credit history if you do not have one at all.
Combine other sources of income
You’re permitted to work limited amounts without losing your disability benefits. Asides making yourself more comfortable with extra sources of income, these extra sources can also come in handy when applying for a car loan. It shows that you have more income at hand to afford loan repayments. This can increase your trust ranks with the lender. Other sources of income can include part-time jobs or seasonal jobs. Make sure you submit proof of this income together with your loan application. Proof of income can also include bank receipts, pay stubs or tax documents. This will give the lender a clear overview of your income.
It’s also important to submit a copy of your bank statement. Your bank statement will reflect your spending and saving habits. You’re more likely to get approved for a loan if you have a balanced income and expenditure.
Get a co-signer
It’s possible that you’re unable to work when having a disability. In this case, you can get a trusted family member or friend to support you as a co-signer. This also helps you if you don’t have the substantial income to qualify for a loan. A co-signer agrees to share the risk and pay up the loan repayments if you’re unable to. This is a very important role and it is vital that you’re completely honest with your co-signer about your budget and income. The co-signer should also understand the terms and risk involved before agreeing to take on this responsibility.
Your co-signer has to have a good source of income and good credit score to qualify as a co-signer. The co-signer can also to decide to boost your chances the more by providing property as security for your loan. Bear in mind that you could soil a good relationship by not adhering to the terms of the agreement and making due loan repayments. Your co-signer’s credit will also be negatively affected if you default with the loan repayments.
Set up a budget
It is important to set a budget so you’re sure you’re able to make loan repayments and cover your living expenses at the same time. The first step to take is to search for a car within your means. Most lenders will only approve a car loan with an amount less or equal to 30% of your annual income. Estimate your other expenses together with your monthly loan repayments to see if you can afford the car loan. You do not want to fall into more financial difficulties by not planning right. A car can also be really expensive to run, considering ongoing costs for fuel, servicing and car repairs. Be sure to also estimate this while calculating your monthly budget.
Save up for a down payment
A down payment is an initial deposit made to cover part of the cost of the car at the beginning of the loan term. It is understandable that saving for a deposit might prove more difficult with a disability loan, but this can really improve your chances. A substantial down payment also reduces the amount you’ll have to repay monthly. It also ensures that you’re not paying more than the value of the car based on depreciation. It is advisable to pay at least 20% of the car cost upfront.
Written by Jacaranda Team