Considering applying for car finance but unsure about what lenders are looking for? Let us help break down the car finance application process, and look into what lenders will have a look at when reviewing your car finance application. It will include some tips to help make your application the strongest it can be.

The Basics of Car Finance Credit Checks

Why Credit Checks Matter

In the realm of car finance, credit checks are a fundamental step in the application process. Lenders use these checks to assess how financially responsible you are, and how reliable you are likely to be if they give you a loan.

They conduct two types of credit inquiries: soft and hard. Soft credit checks are preliminary reviews that do not affect your credit score, offering lenders a brief overview of your credit history. On the other hand, hard credit checks provide a detailed view of your credit history, including your track record of repaying debts and managing credit. Although hard checks can temporarily lower your credit score, they are a necessary step for final loan approval.

If you want more information about the difference between a hard and a soft credit inquiry, you can take a look at our article Navigating Credit Checks to get up to speed!

Understanding Your Credit Score

Your credit score is a critical factor in determining your eligibility for car finance. It's a numerical summary of your creditworthiness, derived from your credit history. This score influences not only your chances of approval but also the interest rates and terms of the loan. A higher score typically translates to lower interest rates and better loan conditions. Again, we have a detailed, easy-to-digest summary looking at what a credit score is.

You will see throughout this article that the keyword associated with a positive credit score is stability, and with lower credit scores that may need improving: risk.

Key Factors Lenders Consider

Identity Verification and Personal Details

Lenders require proof of identity to prevent fraud and make sure that the information provided is accurate. This process typically involves verifying your full name, date of birth, marital status, and residential status. 

For any car finance application, a Driver’s Licence is, of course, essential to progress with the application, and can be used to confirm your details. Providing accurate personal details is crucial, as any differences between information given and what is on your documents can raise concerns about fraud or identity theft.

Address History and Stability

Lenders view your address history as a reflection of your stability. They usually require a minimum of three years’ address history, with a preference for continuity and stability. 

‍TOP TIP - a quick way to show proof of name and address is to make sure that you are on the electoral roll (for England, Scotland and Wales). This is a quick way for lenders to quickly verify your key personal details at the same time.

Income and Employment Verification

Proving your income and employment is key to determining your ability to repay the loan. Lenders look for stable and consistent income and employment history. For employed individuals, this may involve providing recent pay slips and employment details. Self-employed applicants will need to provide additional documentation, such as tax returns or bank statements, to show their income stability.

A strong employment history with consistent income makes your application more attractive to lenders - it shows that you will be able to make your loan payments. 

Your Payment History

Your payment history is a crucial component of your credit report. It reflects your consistency in paying bills and debts on time. Late payments, defaults, bankruptcies, IVAs and accounts in collections are red flags for lenders, as they show risk. A solid history of timely payments, on the other hand, boosts your creditworthiness.

Potential lenders will generally look at the last 3 years of your credit report.

Credit Utilisation and Debt Management

Credit utilisation – the ratio of your current revolving debt (like credit card balances) to your total available credit – is a significant factor.

‍If you have a credit card limit of £1,000 and you have used £100, that is 10% credit utilisation (low). If you have used £900, that is a 90% credit utilisation ratio (high).

‍High credit utilisation generally indicates that you may rely on credit too much, so may struggle managing new debt if you get granted car finance. Keeping your credit utilisation low - we recommend a maximum use of 25 and 30% - demonstrates responsible credit management. Additionally, managing your existing debts well by maintaining low balances and completing loan payments on time enhances your credit profile.

New Credits and Credit Inquiries

Opening multiple new credit accounts in a short period can be seen as risky behaviour by lenders. It suggests financial stress or mismanagement of money, which often negatively impacts your credit score, and lenders' perception of your financial stability. Limiting new credit applications before seeking car finance can positively influence your credit evaluation.

Preparing for a Car Finance Application

Improving Your Credit Score

Improving your credit score is a proactive way to improve your chances of getting your loan application accepted. Regularly check your credit report for inaccuracies, and dispute any errors. Develop good credit habits (check out our nine nifty tips): pay your bills on time, keep credit card balances low, and avoid unnecessary credit applications. Gradually, these practices will positively affect your credit score.

Great news: Ozoomi Boost is a simple yet effective way to improve your credit score AND start building a deposit towards your dream car at the same time!

It doesn’t require a credit check to get started, and the loan is interest free. It is a great way to start proving your financial stability to potential lenders, if you want to improve your credit score.