When you apply for a loan, lenders need to assess whether you can afford the repayments and whether you are likely to pay them back. This guide explains what they look at and why.
Understanding these factors can help you prepare a stronger application and avoid surprises during the approval process.
Income and Employment
Your income is the most important factor in determining how much you can borrow. Lenders want to see that you have stable, reliable income to cover repayments.
- Permanent full-time employment is viewed most favourably
- Part-time, casual, and self-employed income can also be accepted
- Length of employment matters - generally 3-6 months minimum
- Lenders may discount variable income like overtime or bonuses
- Multiple income sources can be combined
Credit History
Your credit report tells lenders how you have handled credit in the past. It includes information about loans, credit cards, defaults, and payment history.
A good credit score can help you access better rates, while a poor score may limit your options or result in higher interest rates.
Credit Score Ranges
Scores typically range from 0-1200. Above 700 is generally considered good, while below 500 may require specialist lenders.
Negative Listings
Defaults, judgments, and bankruptcies stay on your credit file for 5-7 years. However, their impact lessens over time.
Living Expenses
Lenders must assess your living expenses to ensure you can afford repayments. This became more rigorous after responsible lending laws were strengthened.
Be prepared to provide details about rent or mortgage, utilities, insurance, food, transport, and other regular expenses.
Existing Debts
Any existing debts reduce your borrowing capacity. Lenders look at your total debt picture including credit cards (even if not used to the limit), personal loans, car loans, and Buy Now Pay Later accounts.
Paying down existing debts before applying can improve your borrowing capacity.
The Asset Being Financed
For car loans, lenders also assess the vehicle itself. Factors include the age of the car, kilometres travelled, and whether the loan amount is appropriate for the value.
Older cars or very high-mileage vehicles may attract higher rates or shorter loan terms.
Key Takeaways
- Stable income is the foundation of any loan application
- Your credit history affects rates and approval chances
- Be honest about living expenses - lenders will verify
- Existing debts reduce how much you can borrow
- The vehicle itself affects car loan approval