What do lenders look for when approving a vehicle loan?

If you’re looking for a new car, all your attention might be on finding the right vehicle. But when you apply for a loan to help with the purchase, your lender will be looking at a much wider range of factors.

Here, we’ll help to explain what lenders are looking for when they assess a car loan application and what you can do to improve your chances of having yours approved 

Your income and employment stability

A key aspect of any loan application is your income. Lenders will want to know what you earn and how reliable and stable your source of income is likely to be.

What do lenders assess? 

• Gross and net income: You’ll need to show what you’re paid, both before and after tax.
• Your employment status: Are you employed full-time? Or do you work as a contractor or self-employed? Your employment status is part of the picture. Sometimes, self-employed people, including contractors, need to show a longer earnings history than someone who is a salaried employee.
• Length of employment or business history: If you’ve only been in your job a short time, the lender might want to see you build up a few more months’ work history with your employer before you apply for a loan. Often, being able to show three to six months of stable work with an employer is helpful. If you are self-employed or have your own business, you are likely to be asked to provide your financial accounts and/or your bank account statements for a period of time, to give the lender confidence that you’ll have income into the future. This isn’t always the case, though, and we can help you to look at your options if your business is still quite new.

Why does it matter? 

Lenders want to be able to see this evidence of income so they can ensure that you can service any loan that you are taking out, as well as continuing to meet your existing commitments. When you have a stable, consistent income, it’s less likely that you’ll suddenly be in a position where you no longer have sufficient income to make the repayments.

If you’re self-employed, you’ll need to be able to produce documentation such as bank statements and tax returns to give evidence of your financial situation. Sometimes, if you’re new to business, your accountant may be able to provide projections that can help, too.

Sometimes, people have seasonal or fluctuating income. This can make it harder to prove an income history, but we can help you determine ways to address this.

Your expenses and living costs

Another important part of the picture is the other costs that you have to cover. New Zealand lenders have to ensure any loans they approve are affordable for the borrower, based on information they can verify, and can face penalties if they don’t.

That means they’ll want to thoroughly review your other expenses and living costs, and any debt repayments you have, to ensure that you have sufficient space in your budget to afford your new repayments.

The lender will look at things like your rent or mortgage payments, other debt repayments you have, such as credit card or personal loans, how much you are spending on your power, broadband, phone, insurance and other bills, as well as other ongoing costs like childcare, transport, and groceries.

The amount of disposable income you have determines how much you can afford to pay for your new loan, and how much a lender can offer you.

Your credit score and credit history

Lenders will usually also want to see evidence of a solid credit history and credit score. That is likely to involve a check of your credit score from one or more of the New Zealand agencies – Centrix, Equifax and Illion.

The lender will also look at your repayment history and any defaults to help determine whether you’re the type of person who is likely to pay back your loan. Other factors that might be considered include any BNPL lending you have, your credit card usage and how you’ve managed previous loans.

These factors may affect how likely a particular lender is to approve your application, and higher credit scores may mean you get offered lower interest rates than someone with a low credit score. You may also be able to get a loan with a smaller or no deposit if you have a good credit history. But that does not mean that it is impossible to get a loan with bad credit. We can help you to look at your options.

Lenders may also consider your debt-to-income ratio – the amount of money you already owe compared to your income, and how much your new loan would add to this. You may improve your approval chances by paying off other debt.

Deposit size

Another factor that might be part of the lender’s assessment is the level of deposit you have to offer. When a buyer offers a deposit on the vehicle they are buying, it can reduce lender risk. Not only do they not have to borrow as much money to buy the vehicle, but they have some “skin in the game” because they have saved up to offer some money of their own for the purchase.

This might help your approval chances, could mean lower interest rates and can also help you to stay away from negative equity, where the value of your car drops below the amount you owe on it. When you have a smaller deposit, or no deposit at all, there’s a higher chance that the car might depreciate more quickly than you pay off the loan.

The vehicle itself

Your lender is likely to also consider the vehicle you’re trying to buy with the borrowed money.

It will look at whether it’s a new or used vehicle, the condition it is in, the age of the vehicle and the price you’re paying compared to market value.

These considerations are particularly important when you are taking out a secured loan, because your lender is usually going to use the vehicle as security for the loan. This means if you don’t make your repayments, the lender could take the vehicle and sell it to clear what it is owed. If the car is not worth much, this may affect what it can recover, and may mean there is still a debt outstanding for the borrower to repay, even if they no longer have the car.

Buying a car that is prone to breaking down or a high risk in other ways can also affect your application because a lender may see the possibility for you to have to spend a lot of money on its upkeep, potentially putting you in a difficult financial situation.

Loan term and structure

Your lender may also take into account the loan term that you need, your repayment frequency, and how that fits in with its appetite for the deal.

Things like balloon payment structures can change the risk assessment. Longer loan terms can reduce your payments but may increase the total risk to the lender, although you will usually pay more in interest.

Loan type

Lenders will look at whether you want a secured or unsecured loan. Secured loans are typically easier to approve because the lender has more reassurance that if you do not make your repayments, it can usually still recover what is owed. Secured loans also often have lower interest rates. However, the primary factor a lender will consider when assessing your application is affordability. Even if you can offer strong security, your loan is unlikely to be approved if you can’t clearly show you can afford the repayments as well as your current living costs and other commitments.

As we’ve already said, when a loan is secured against an asset – usually a vehicle – the lender can take that asset and sell it if it needs to, if you do not pay back what you owe.

Common reasons vehicle loan applications are declined

There are a few common reasons that loan applications might be declined. We can work with you to help you avoid them at the outset.

Insufficient income relative to expenses

If you’re not earning enough to cover your outgoings, lenders can’t evidence that you are in a position to be able to repay a loan, and will not approve a loan where there is no clear affordability for the proposed repayments.

Poor credit history

If your credit isn’t great, lenders may be wary. It’s often possible to find a lender who is willing to help, though.

Too many recent applications

If you’ve applied for a lot of credit lately, this will usually show up on your credit history and may make lenders wary. We can help you to explain this activity in your application.

Unrealistic loan amount for your income 

If you’re trying to borrow a large amount and do not earn enough to be able to service the debt, you’re likely to be turned down. This is because lenders have an obligation not to lend more than people can afford.

How to improve your chances of approval?

There are a few quick steps you could take to help boost your chances of approval. We can also help you to ensure your application is in great shape before you apply.

Check your credit report 

This will give you an up-to-date idea of your current credit score and what lenders will see when you apply. If there’s anything that needs to be corrected or rehabilitated, you can do this before your application is made.

Reduce existing debts where possible 

If you have other debts you can pay down or pay off, this may help improve your chances.

Save a deposit  

This will show you have the space in your budget to save money, as well as mean you don’t need to borrow as much to purchase your vehicle.

Choose a realistic vehicle within your budget  

Keep your dreams in check and make sure that you really can afford any vehicle you’ve got your eye on.

Get pre-approval before shopping  

Getting pre-approval early will give you a good idea of what sort of budget you’re likely to be working with, and may make the process smoother.

Frequently Asked Questions (FAQs)

What is the minimum income required for a vehicle loan in NZ?

There is no set minimum. It will depend on how much you are trying to borrow. Lenders need to be satisfied that you can afford any proposed loan.

Can I get approved during an employment probation period?

You may be able to. We can help you to look at your options.

Does changing jobs affect approval?

Sometimes, lenders often like to see a period of stable employment. But if you’ve recently made a move, that doesn’t mean you’re always out of luck. We can help.

Can I apply jointly with someone else?

Yes, you can, and sometimes it can really help. We can work through your options with you.

How long does vehicle loan approval take in NZ?

You might be surprised at how quickly we can get you an answer. It can sometimes happen within a day.

Want to talk?

If you have any questions about any aspect of personal loans, including how you can get a loan for your next vehicle, get in touch with us. We are finance experts and can help you navigate the whole process.

Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion, and seek independent guidance.