Car Loan approvals - 5 things lenders are looking for in 2023

If you are considering buying a car and need finance approval you can greatly improve your chances of success and a good rate if you know what lenders are looking for and have all their requirements covered.   

When you apply for a car loan, the lender will consider a variety of factors to determine your creditworthiness and the risk associated with lending to you. These factors can include the applicant's income, credit history, and debt-to-income ratio, among other things. In this article, we will discuss five key things that lenders look for when reviewing loan applications.

Credit Score

A person's credit score is one of the most important factors that lenders consider when evaluating a loan application. 
Your credit score can have a significant impact on the interest rate you are offered on a car loan. In general, individuals with higher credit scores are considered less risky borrowers and are therefore offered lower interest rates. Conversely, individuals with lower credit scores are considered riskier borrowers and may be offered higher interest rates.

When you apply for a car loan, the lender will check your credit score and credit history to determine your level of creditworthiness. Your credit score is a numerical representation of your creditworthiness, and it is based on information in your credit report. Your credit report contains information about your credit accounts, payment history, and other factors that are used to calculate your credit score.

If your credit score is high, it demonstrates that you have a good credit history and have been responsible with credit in the past. You will likely qualify for a lower interest rate on your car loan because you are considered less risky. On the other hand, if your credit score is low, the lender may see you as a higher risk and offer you a higher interest rate to compensate for that risk.

It's worth mentioning that some lenders may have a minimum credit score requirement for car loans, so if you have a very low credit score, it might make it difficult to get approved for car loan, or you might be offered a rate that you consider too high.

To get a good idea of what the interest rate on your car loan could be, you can use an online car loan calculator or simply complete a car finance inquiry with us.  There is no obligation to take out a car loan, making the inquiry won't affect your credit score and as part of the process, we will give you your current credit score. 

Maintaining a good credit score is important not only to get approval but also to get the best rate possible on a car loan, as a good credit score can result in a lower interest rate and lower monthly payments, which can help to make car ownership more affordable.

Want to know more about credit scores?  Check out our credit score guide  

Income and Employment:

Lenders also consider a person's income and employment status when evaluating a loan application. Your income and employment can play an important role in your chances of getting approved for a car loan. Lenders typically want to see proof of a steady income, such as pay stubs or tax returns, in order to determine your ability to repay the loan.

A stable and steady income is important to a lender because it demonstrates that you have the financial means to make the loan payments. If you are employed and have a steady income, it can increase the likelihood that you will be approved for a car loan. If you have a high income, it can also increase your chances of getting approved for a larger loan amount.

The lender also looks at the stability and tenure of your job, if you have a stable job and have been employed with the same company for a while, this can demonstrate that you have a reliable income and are more likely to be able to make your loan payments on time.

On the other hand, if you have a fluctuating income or a recent change of employment, it may be seen as a red flag and could negatively affect your chances of getting a car loan.

Self-employment or freelance work can also be taken into account, but lenders may consider self-employed people as higher-risk borrowers and may require more documentation to verify income.

Learn about: car loans for self-employed

Having a stable and steady income, as well as a good employment history can improve your chances of getting a car loan. Lenders want to see that you have the means to repay the loan and that you are less likely to default on the loan. Demonstrating a reliable income can be a key factor in getting approval for a car loan and also getting a lower interest rate on the loan.

Debt-to-Income Ratio:

A person's debt-to-income ratio (DTI) is another important factor that lenders consider. 

Your debt-to-income (DTI) ratio is a financial measurement that compares the amount of money you owe to the amount of money you earn. This ratio is used by lenders to evaluate your creditworthiness and determine the risk associated with lending to you. A high DTI ratio can negatively affect your chances of getting approved for a car loan.

The DTI ratio is calculated by dividing your total monthly debt payments by your gross monthly income. Lenders generally like to see a low DTI ratio, as it indicates that you have a good balance between your income and your debts. A high DTI ratio may indicate that you have too much debt relative to your income and may have difficulty making your loan payments on time.

Lenders typically have guidelines and limits when it comes to DTI, they may consider a maximum DTI ratio that a borrower should have, and above that they may not approve the loan or may approve it at a higher interest rate.

A low DTI ratio suggests that you have a good balance between your income and your debts and that you will have more disposable income available to make your loan payments.

It's worth mentioning that different lenders may have different DTI ratio requirements.  Some might have higher or lower limits or even look at the ratio in different ways. For example, looking just at credit card debt or including other factors like rent/mortgage payments, some could use the front-end DTI which considers only housing expenses, and some back-end DTI which includes all your debt.

In summary, DTI is a key factor that lenders consider when evaluating your application for a car loan. A low DTI ratio can improve your chances of getting approved for a car loan and can also help you get a lower interest rate on the loan. It’s important to manage your debt and to make sure your DTI ratio is within an acceptable range before you apply for a car loan.

Purpose of the loan:

The age of the vehicle you wish to purchase can affect your chances of getting approved for a car loan, as well as the terms and conditions of the loan.

When it comes to new cars, lenders are more likely to approve a loan and offer more favorable terms such as lower interest rates, longer loan terms, and higher loan-to-value ratios. This is because new cars are considered to have a lower risk of depreciation and are less likely to require repairs or maintenance. Furthermore, new cars generally come with a warranty from the manufacturer which can also be a factor that makes them more desirable for lenders.

On the other hand, older cars are considered to have a higher risk of depreciation and are more likely to require repairs or maintenance. Lenders may be more cautious when it comes to approving a loan for an older car and may offer higher interest rates, shorter loan terms, and lower loan-to-value ratios. Some lenders may even have a maximum age for the car they're willing to finance, so it's important to verify this beforehand.

It's worth mentioning that the condition of the vehicle is also important, even if the vehicle is new, if it has a major accident history or other signs of wear, it may decrease its value and increase the lender's risk.

In summary, the age of the vehicle can have an impact on your chances of getting approved for a car loan. New cars are generally considered to be less risky for lenders, and as a result, you may be more likely to get approved for a loan at a better rate than for an older car. It's important to take into account the age and condition of the vehicle when applying for a car loan and to be realistic about your chances of getting approved.

Payday Loan History

When it comes to applying for a car loan your credit score matters and one thing that can potentially damage your chances of approval are payday loans.  Payday loans indirectly indicate to potential lenders that you may be struggling to manage your finances. While loan decision rules regarding payday loans differ from lender to lender, we highly recommend avoiding payday loans for at least a month or two before applying for a car loan. 

Car Loan Approval Summary

In summary, when applying for a car loan, the lender will consider a variety of factors in order to determine the applicant's creditworthiness and the risk associated with lending to them. A good credit score, steady income, low debt-to-income ratio, and the purpose of the loan are some of the key things that lenders look for when reviewing loan applications.