Martin Hawes: Know the credit rules

Credit is not a given any more. To get a loan, you have to understand the rules and make yourself loan-worthy.

Potential borrowers need to understand the new lending criteria because they're here to stay. There will be no headlong rush back to the loose credit of two years ago - if anything, I expect lending rules may become even tougher.

The lending criteria of a couple of years ago were ridiculously free and doomed to cause problems for lender and borrower alike.

The current tighter lending policies are not unusual - we are simply seeing a return to prudent banking principles.

The loose criteria, in which it became possible to borrow 100 per cent of a property's value, was an aberration.

Now that more usual criteria are being applied, it's good to remind ourselves how banks assess applications.

Assessment for lending is always done by looking at the three Cs: character, cash flow and collateral.

A lender's first assessment is of your character as a borrower.

Essentially the lender is asking whether or not you are the kind of person with whom it wants to do business.

This is done objectively by a credit check but some bigger loans will also be done subjectively as the lender judges your trustworthiness and competence.

Your cash flow is the second thing assessed.

The lender will want to see how you plan to meet your repayment obligations and if it can't see where your income is coming from, it will not want to lend.

Obviously, the more certain your income is the better - a salaried hospital doctor will seem like a far better bet than a real estate agent with lumpy and uncertain income.

Collateral is the security you offer for the loan.

Housing is regarded as the best security.

The better your position against these criteria, the more likely you'll get your loan.

And at a time when they're harder to get, you'll also be in a better position to negotiate the best deal.

Each week financial author Martin Hawes shares strategies to help you grow your wealth. You can email finance questions to info@wealthcoaches.net or andrea.milner@heraldonsunday.co.nz.

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