Firstly, who are lenders?
These are the organisations who actually lend money to people to buy cars. Most people think of banks, which are a classic example of a lender.
The term ‘lender’ can also refer to niche organisations too. For example, some smaller companies that specialise in lending to borrowers with poor credit history, newly employed people or those looking at older vehicles.
There are dozens of different lenders operating in Australia.
The great thing about having a large number of lenders is that borrowers can potentially match their circumstances to the right lender. This typically means higher chances of approval and access to lower rates.
The words lender and lending institution are used interchangeably.
Who do lenders look for in an applicant?
Lenders want to make sure that applicants can comfortably repay a car loan without any issues. This sounds pretty straightforward, but a lot goes into it.
Good customer service is key
When an applicant gets approved for a car loan, they become a lender’s client. Like all businesses, lenders want to provide good service for their clients. This means ensuring clients enjoy their new cars and pay the loans back without sacrificing their lifestyle. Happy days!
On the other hand, the last thing lenders want is to lose money
Like all businesses, lenders don’t want to lose money. To avoid this, they have to make sure their borrowers (clients) can make loan repayments.
If a borrower struggles or can’t make payments, the lender is out of pocket. This can mean extra time and resources diverted to assist the borrower with other solutions, which in turn, cost the lender more money.
Furthermore, it could mean friction between the lender and their client, creating a bad reputation.
Here’s how they work it out.
1. Bank statements
Lenders will likely want to see three months or more of an applicant’s bank statements. This is to check their money management.
- Does the applicant regularly gamble?
- Do they make numerous ongoing payments to things like streaming subscriptions, online games, gyms or existing loans?
- Does the applicant save money each pay cycle?
- Is their bank account ever overdrawn?
- Have they recently made any large cash withdrawals?
The lender will need to calculate and assess the applicant’s lifestyle and spending habits to make sure they can service the loan.
Ideally, an applicant will have clean banking conduct reflected in their bank statements.
I don’t have clean banking conduct!
Banking conduct is not the be all and end all of loans. If your bank statements have a few iffy numbers, you may still get approval as lenders take your whole situation into account.
2. Employment and income
In order to service a car loan, applicants must have a source of income. This can come in a variety of forms, for example;
- Full time employment
- Part time or casual work
- Commission
- Self employment, which includes contractors, freelancers and sole traders
- Business directors
There’s also additional income to consider for some applicants;
- Rental income
- Centrelink or other forms of support
- Bonuses
- Bond (coupon) payments
Lenders take all forms of provable income into consideration. Note that only certain forms of Centrelink payments can be taken into account when applying for loans.
Ideally, applicants will have a stable form of income that can support car loan repayments.
I don’t have stable income!
To service a loan (make the repayments) a borrower needs a form of income. Depending on other factors, you could receive approval for a loan product fitting your circumstances even if you don’t have stable income.
3. Credit History
Everyone in Australia over the age of 18 will typically generate a credit report when they first get a bill in their name. This could be a phone bill or utility bill for example.
Credit reports contain personal information, credit enquiry history, loan repayment history, details of any businesses a person may be a director of and a host of other details.
Also within a credit report, is a credit score. Often scaled from 0-1,200, these scores grade a person’s credit management. The higher the score, the better.
Things like missed loan repayments or outstanding bills and multiple credit enquiries can knock a credit score down. On the other hand, making repayments on time can boost a credit score.
Reporting agencies like Equifax are responsible for these reports and can provide you with a copy.
Lenders will likely look at an applicant’s credit report to check their credit history.
Ideally, an applicant will have credit history that shows all previous and existing finance is up to date. Their credit score will also be high.
I don’t have good credit history!
Remember, lenders look at an applicant’s whole profile, not just credit history. Even if you have bad credit, you may still qualify for the loan product you’re looking for. Furthermore, credit reports and credit scores can, and often do, improve over time.
4. Other factors
Lenders also take the following into consideration when looking at applicants.
Residence – lenders need to know where their borrowers are living and, if it’s a car loan, where the vehicle they finance is housed. Ideally, applicants will have two years of confirmed residential history.
References – lenders will typically ask for two references who need to be adults in Australia, not living with the applicant or living together. For example, a friend and a family member.
The vehicle or loan purpose – knowing exactly what the funds will be used for is crucial for lenders. They’ll need to know the year, make, model and variant of the vehicle and registration number. Generally, newer vehicles are easier to finance as they’re under warranty and have a higher resale value.
An ‘ideal applicant’ is someone who can and will prove they can comfortably repay a loan. However, many people who get approved for car loans don’t meet these ‘ideal’ conditions.
Lenders know that life can throw some unexpected situations so that’s why there are dozens of lenders in Australia specialising in different kinds of ‘ideal’.
If you’re not sure where your circumstances fit, it might be worth finding out, speak to us today. Knowing where you stand, what’s on offer and what to aim for can really help.
