One part of a loan application regularly takes people by surprise: the detailed questions about everyday living expenses.
Most people know roughly what their rent, mortgage or electricity bill costs. Fewer people can immediately say what they spend each month on groceries, transport, insurance, subscriptions, medical costs, pets and the expenses that arrive only once or twice a year.
The goal is not to produce the smallest possible number. It is to provide an honest figure that reflects how you actually live and gives the lender enough information to assess the application properly.
Why lenders ask about living expenses
For consumer credit, responsible-lending obligations can require reasonable inquiries about a person's financial situation and reasonable steps to verify that information. The lender ultimately decides its assessment process and whether an application meets its criteria.
ASIC explains that a credit provider or credit-assistance provider must not provide or assist with an unsuitable consumer credit contract. You can read ASIC's overview of responsible lending obligations.
This does not mean every lender asks identical questions. The categories, evidence and assessment method can vary with the lender, loan type and purpose.
What may count as a living expense?
Expense forms commonly separate regular household spending into categories. Depending on the application, you may be asked about:
- rent, board or mortgage payments
- groceries and household supplies
- electricity, gas, water, telephone and internet
- vehicle running costs and public transport
- insurance premiums
- medical, dental and pharmacy costs
- childcare, school fees and other dependent costs
- clothing and personal care
- subscriptions, entertainment, dining out and holidays
- pet expenses
- other regular or recurring commitments
Existing loan repayments, credit cards, buy now pay later accounts and similar commitments may appear in separate parts of the application. Follow the wording of the form rather than counting something twice or leaving it out because you are unsure where it belongs.
How to prepare an accurate monthly figure
1. Start with your actual transactions
Review recent bank and credit-card transactions instead of relying only on memory. Look far enough back to notice less frequent spending, not just the bills from a quiet week.
Moneysmart's guide to tracking your spending recommends reviewing transactions so regular and occasional costs are easier to see.
2. Convert irregular costs into a monthly amount
Annual insurance, registration, school costs, servicing and similar expenses still affect the household budget. Divide annual costs by 12 and quarterly costs by three to create a realistic monthly figure.
3. Include the ordinary costs that are easy to forget
Small subscriptions, takeaway meals, fuel, pet care and cash purchases may not feel important individually. Together, they can materially change the total.
4. Separate personal and business expenses carefully
If you are self-employed, make sure you understand which expenses belong to the household and which genuinely belong to the business. Your accountant can help with accounting or taxation questions; the finance application still needs to reflect your real personal position.
5. Explain unusual transactions
A one-off holiday, medical bill, vehicle repair or transfer between your own accounts may make a statement look different from a normal month. A clear explanation and supporting information can be more useful than hoping the transaction will not be noticed.
Should you cut spending before applying?
Reviewing unnecessary expenses can be sensible if it is part of a genuine, sustainable change. It may also help you decide whether the proposed repayments will feel comfortable.
However, temporarily moving spending elsewhere or understating expenses is not a sound strategy. The lender may compare declared figures with transaction history or ask for clarification. More importantly, an unrealistic budget can lead to a loan that places too much pressure on you later.
The strongest application is not the one with the lowest-looking expenses. It is the one that is accurate, explainable and supported by the available information.
What if your figures do not match a lender's benchmark?
Lenders may use benchmarks as part of their assessment, but the exact approach varies. If your declared expenses appear unusually low or differ from the transactions supplied, the lender may use a higher figure or request more information.
That does not automatically mean the application will be declined. It means the numbers need to make sense together. Preparing the information before submission gives the broker a better chance to identify inconsistencies and explain legitimate differences.
How I help before an application is submitted
I would rather identify a problem before creating a formal application than send information to a lender and hope for the best.
Where relevant, I can help you:
- understand the categories being requested
- identify information or documents that may be missing
- separate regular spending from genuine one-off transactions
- consider whether the proposed repayment is realistic
- compare suitable lender options without hiding the trade-offs
If the application relates to a vehicle, you can also read about my approach to car finance in Perth.
The simplest place to start
Before applying, list your income, regular commitments and ordinary household expenses. Review the figures against your transactions and add the annual costs that are easy to overlook.
You do not need to make the numbers look perfect. You need them to be honest enough that the proposed loan can be considered against your real circumstances.
General information only: This article does not take into account your objectives, financial situation or needs and is not legal, taxation, accounting or financial-planning advice. Loan requirements, responsible-lending obligations and assessment methods vary according to the credit purpose, lender and applicant. Credit approval is subject to lender criteria.