The café owner’s stretched serviceability
Hemi, 38, owns a café and applies for a $48,000 loan to buy a used ute for deliveries and personal use. He provides two years of financial statements and says his drawings are $7,800 net a month. His last three months of bank statements show average drawings of $7,200 because quieter trading and higher coffee costs have reduced cash flow. He lists monthly expenses of $2,450 for mortgage, rates and insurance; $1,100 groceries; $380 utilities; $780 childcare; $420 transport; $260 insurance; $310 credit card minimum; $540 existing personal loan; $160 BNPL; and $300 other. The proposed loan is over five years at 10.9%, with repayments of $1,040 a month. His credit report shows a $780 default from 2022 that was paid and satisfied, and three credit enquiries in the last four months.
1. Calculate Hemi’s monthly surplus using the lower income figure, then test the proposed $1,040 repayment with a 10% buffer. What is the affordability conclusion?
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Use the lower verified income of $7,200, not the stated $7,800, because the bank statements show the recent trend and a lender must not rely on optimistic figures where evidence is mixed.
Listed expenses total: $2,450 + $1,100 + $380 + $780 + $420 + $260 + $310 + $540 + $160 + $300 = $6,700. Surplus before the new loan is $7,200 − $6,700 = $500 a month. The proposed repayment is $1,040, so the shortfall is $540 a month before any buffer. With a 10% buffer, the tested repayment is $1,144, producing a shortfall of $644 a month.
The loan is not affordable on these figures. Approving it would rely on Hemi finding extra income, cutting essential expenses or using the business to subsidise personal repayments. Each of those is uncertain. The lender should decline the $48,000 structure unless the loan is reduced, a deposit is provided, the existing personal loan is refinanced into a demonstrably cheaper structure, or a credible second income is verified. Simply lowering the repayment by extending the term does not cure a negative surplus; it increases total interest and keeps the borrower exposed for longer.
2. What further verification should the lender complete, and how should the satisfied default and recent enquiries affect the decision?
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The lender should obtain at least six months of business and personal bank statements, the latest GST returns and tax return, and evidence of the drawings actually transferred to Hemi. It should confirm the café’s rent, wages, supplier payments and any tax arrears, because business cash flow can distort personal drawings. It should verify the existing personal loan balance and repayment, the credit card limit and minimum, and each BNPL facility. The three recent enquiries should be explored: they may indicate undisclosed debt, a failed application elsewhere or shopping for credit, all of which affect the surplus.
The satisfied $780 default from 2022 is old and small. It should be explained and considered, but it is not automatically disqualifying; recent conduct and the reason for the default matter more. The lender should not ignore it, but nor should it treat it as the main reason to decline when the arithmetic already fails. The file should record the lower income used, the expense verification, the shortfall calculation and the specific reason for the decision. If the lender approves on a reduced loan or with a guarantor, it must re-run the assessment against the new structure.
3. Hemi asks the lender to stretch the term to seven years to make the loan “affordable”. Assess that request.
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Extending the term reduces the monthly repayment but does not create surplus. On a $48,000 loan at 10.9% over seven years, the repayment falls only modestly while total interest rises. Hemi’s underlying shortfall is caused by expenses exceeding income, not by the term. A longer loan also leaves him owing more for longer on a depreciating vehicle and increases the risk that repairs, registration and insurance become unaffordable later.
The lender should test the seven-year structure at a higher rate, add a buffer and compare the total cost with the five-year option. If the seven-year repayment still exceeds the verified surplus, it must decline. If a reduced loan amount or deposit brings the repayment within surplus, a longer term can be considered, but the lender should explain the higher total cost and the risk of negative equity. A responsible outcome might be a smaller vehicle loan, retaining a cash buffer, or delaying the purchase until the business cash flow stabilises. The lender must document why the longer term was chosen and why it does not create substantial hardship.