What lenders check before approving a car or personal loan

Applying for a loan can feel like being judged by a stranger. It’s less mysterious once you know what the lender is actually doing. Most of the questions trace back to one obligation: the lender has to be reasonably sure the loan suits you before lending. Understand that, and you can prepare in an afternoon.

Why do lenders ask so many questions?

Consumer lending in Australia is governed by responsible lending obligations under the National Consumer Credit Protection Act, with ASIC’s regulatory guide RG 209 setting out how ASIC expects lenders to meet them. In broad terms, before offering you a car or personal loan, a lender must:

1. make reasonable inquiries about your financial situation, your requirements and objectives;
2. take reasonable steps to verify your financial situation; and
3. assess whether the loan would be unsuitable for you, for example because you couldn’t repay it without substantial hardship.

Moneysmart sums up the effect: lenders must decline a loan if they assess it could cause you hardship, even if you feel sure you can repay it. Every question on an application maps to one of those three steps.

How do lenders look at your income?

Income is the starting point. Lenders want to know how much you earn, how often, and how reliable it is.

• Employees usually provide recent payslips, and sometimes an employment letter.
• Casual or contract workers may be asked for a longer history to show income is steady.
• Self-employed applicants usually provide tax returns, notices of assessment or business bank statements.
• Government payments may be considered as income, depending on the lender and the payment.

Bank statements often confirm what you’ve said, because the deposits are there to see.

Why do your expenses matter so much?

Because income only tells half the story. Lenders compare what comes in with what goes out to see whether the new repayment fits. Expect questions about:

• rent or mortgage repayments;
• groceries, utilities, phone and internet;
• transport, including the running costs of any car;
• childcare, school fees and health costs;
• insurance; and
• other debts: credit cards (often assessed on the limit, not just the balance), buy now pay later, personal loans and car loans.

Bank statements are used to check that your figures are realistic. This is where honesty pays off. If your stated expenses don’t match your statements, expect delays and follow-up questions. Our car budget planner uses the same categories, so it’s a good dress rehearsal.

What does your credit report show the lender?

Your credit report is a record of your history with credit. According to Moneysmart, it includes:

What’s on it	Detail
Credit accounts	Loans, credit cards and other credit in your name
Repayment history	The last two years for each product, including payments made more than 14 days late
Defaults	Listed for five years (seven for a clearout), shown as paid if paid
Credit applications	Recent enquiries made when you applied for credit
Credit score	A number from zero to 1,000 or 1,200, depending on the agency

Lenders use your score and report to judge risk. Moneysmart notes a higher score means a lender sees you as less risky, which can mean better deals.

You can get your report free every three months from the credit reporting bodies, Experian and Equifax. Check it before you apply and fix any errors for free with the reporting body.

What about the car itself?

For a secured car loan, the car is part of the assessment because it’s the lender’s security. Lenders may look at:

• the car’s age, kilometres and type, since some loans limit the car’s age;
• its value compared with the amount you want to borrow;
• the seller, especially in a private sale; and
• a PPSR search to make sure no one else’s finance is attached.

For an unsecured personal loan, the lender focuses on you rather than an asset. Our secured vs unsecured guide explains the trade-off.

How do deposits and savings help?

A deposit reduces the amount you borrow, which lowers the risk for the lender and the total cost for you. A record of regular saving shows you can set money aside, which supports the case that you’ll manage repayments. Moneysmart notes lenders may look at your savings, along with your credit score, income and expenses, when they set your rate.

How should you prepare before applying?

A simple checklist:

1. Know your number. Use the car budget planner to find a repayment you can comfortably carry.
2. Check your credit report from both bureaus and fix any errors.
3. Gather documents: photo ID, recent payslips or proof of income, recent bank statements, and statements for any loans or cards.
4. List your expenses honestly, using your bank statements as a guide.
5. Have the car’s details ready if you’ve chosen one: price, VIN, seller and kilometres.
6. Apply once. Moneysmart warns that too many applications in a short time can lower your credit score.

When you’ve ticked these off, you can start your application and see your options before committing.

What if you’re declined?

A decline isn’t the end. Moneysmart recommends asking the lender why (if it was based on your credit report, they must tell you), checking your report for errors, paying down debts, tightening your budget, and waiting before you reapply. Our pages on bad credit car loans and bad credit personal loans cover what helps.

Why do accurate answers speed things up?

Every figure you give is checked against documents. When they match, the lender moves on. When they don’t, the application stalls while someone asks questions, or the outcome changes late in the process. Accurate answers also mean the options you see are realistic, so the repayment you agree to is one you can keep up.

Which small details can trip up an application?

Most delays come from little things, not big ones. Watch for these:

• Names that don’t match. Your name on payslips, bank statements and ID should line up. If you’ve changed your name, have proof ready.
• Forgotten debts. A buy now pay later account or an old store card you rarely use still counts. Lenders can see them on your credit report, so list everything.
• Credit card limits. Even with a zero balance, a high limit may be counted as potential debt. Consider reducing limits you don’t need before applying.
• Recent job changes. A new job isn’t a problem in itself, but have your contract or employment letter handy.
• Irregular income. Overtime, commission and casual hours may be averaged over a longer period, so have more history ready.
• Large unexplained transfers. Be ready to explain any unusual deposits or withdrawals on your bank statements.

Sorting these before you apply makes the process smoother and helps the lender give you an accurate answer the first time.

Prepared, and ready to see your options

Now you know what a lender looks for, you can walk in prepared rather than nervous. Start an application with our secure partner and you’ll see your options before you commit to anything. A real person can help if a lender asks for something you’re not sure about. Please answer every question accurately, especially income, expenses and existing debts, because that’s what turns an application into an approval you can live with.

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