How do car finance lenders decide whether to offer you finance?

Car finance has become more accessible in recent years and more drivers than ever are relying on some form of finance or credit in order to get a car. Buying a car can be expensive and for many drivers, owning a car would not be possible without finance options. However, finance is always subject to status and when you apply for a car loan, lenders will decide whether they want to offer you finance or not. Each lender sets their own requirements for finance but there are a few common factors that many lenders will consider. Knowing what they are looking for can make the finance process easier and get your application in the best shape before you start comparing finance deals.

1.     Credit checks.

A credit check is a common tool used by lenders to see how applicants have handled their credit in the past and uses it to make future predictions. A history of good credit management and making payments on time reduces the risk to future lenders and it can make finance easier to obtain. Low credit or no credit cars can be harder to secure as you are more likely to default on future finance and lenders need to know whether they are going to get their money back or not. Your credit rating can also affect the interest rate offered on car loans and a lower score can make finance more expensive.

If your credit is low, you could consider working on your credit score in the run up to a finance application. Your credit score has a big impact on your financial life and it can be holding you back when its bad. By reducing any current debt you owe, paying all your bills on time and in full and only using credit little and often, you can create new financial habits to help improve your score. It can also be worth checking your credit report to see what information is listed on there and making sure all your details are accurate and up to date. Misinformation on your file can be negatively impacting your score and if it doesn’t match what you put on your application, lenders may be worried it could be fraudulent.

2.     Affordability checks for car finance

Finance lenders have to abide by the rules of responsible lending and can’t lend to anyone who can’t afford to pay back their finance. To avoid this, they need to run an affordability check on any applicants. They can do this by asking your monthly income and can also request payslips or bank statements to prove your income. Some lenders already have a minimum monthly income you will need to meet before you could be considered, and it can vary from around £800-£100 a month. Your budget for car finance should be no more than 20% of your income each month and should never leave you short each month. Finance agreements can last between 3-5 years and its essential you can meet each and every payment throughout the term.

3.     Identity checks.

In order to avoid fraudulent applications, you will need to prove you are who you say you are. You can do this by supplying a copy of your driving license to prove your personal details such as full name and address. Lenders can also use the information on your credit report to verify your identity and make sure everything marries up.

4.     Driving license type.

Car finance lenders won’t offer finance to anyone without a driving license. You could get finance with no license as part of a joint application if your partner has a full UK license but if not, it won’t be possible. There can be options for provisional license holders and European licenses but typically, your finance options will expand once you have a full license. Lenders will request a copy of your license to prove your license type and your identity.

5.     Employment status.

Your employment status and ability to meet your future repayments is important. To put it simply, you can’t get a car on finance if you don’t have a job as you’ll have no way of paying back your loan. Lenders tend to prefer applicants who are in full time employment and have a steady income. This reduces the risk of the loan not being paid back on time if your employment varies or your self-employment. Lenders may request at least 3 months’ worth of payslips to prove your employment and bank statements.