You’re probably already aware than applying for any kind of loan or credit means a lender will check your credit rating. However, since car finance is often a ‘secured’ loan, companies that provide vehicle loans will generally need a little more information from you.
We’re regularly asked what finance companies look for when someone’s buying a car, so here, we’ll explore the subject in a little more detail, and explain what you can expect when you make a car loan application.
The underwriting process
You can’t explore the world of finance very far without coming across the term ‘risk’.
When a bank or loan provider considers a car finance application, they’re essentially considering the risk that they won’t get the money back. If you represent a low risk, your application will sail through, and you’ll be offered an attractive rate. If you represent a higher risk, you’re likely to be charged a higher interest rate – and you may need to provide a larger deposit.
This decision-making process is where underwriters come in. An underwriter is a person responsible for considering the level of risk – before deciding whether finance can be offered – and at what rate.
What information does an underwriter need?
The first thing an underwriter will generally look at is your credit rating. If you have a history of making repayments on credit agreements on time, you’ve probably got a good credit score. On the other hand, if you’ve previously missed payments, or companies have had to use debt collectors to recover what you owe, your credit rating might not be so good.
There are other things which can negatively impact your credit score. For example, if you haven’t had much credit before – or you’ve recently moved to the UK or returned from time living abroad.
Your credit score gives an underwriter the first indication of how much of a risk you represent. If you’ve paid debts back on time before, they’ll assume that the chances are you’ll do it again. Unfortunately, this same rule applies if you’ve had trouble with your finances – so if you’ve missed payments or been late with them, an underwriter will probably take this as an indication that you could do the same again.
So, it’s all about your credit score?
Certainly, a big part of what car finance companies are looking for revolves around your credit score – but there is more to it than that.
We’ve already mentioned that a vehicle loan is going to be attached to your car – and that’s good news because it lowers the risk.
Well, if you take a personal loan, the finance company won’t have any other means of collecting the debt other than hoping you’ll pay it back (and pursuing legal action if you don’t).
If you continue to refuse to pay for a personal loan, you may find that you’re taken to court and issued with a County Court Judgement (CCJ) demanding you pay – but, even then, there’s a chance that you won’t be expected to repay if you begin insolvency proceedings – like applying for an IVA or bankruptcy.
If you think that it sounds like the potential for a lot of hard work for the finance company, you’re completely right. With an unsecured loan, there is a small chance that the finance company could find themselves out of pocket.
Security and risk
So, what about a loan that’s secured against your car – like an HP or PCP deal?
When finance is secured against your car, things are much easier for the finance company if you can’t or won’t pay. In short, they’ll recover your car, sell it, and recoup their money that way. Hence – the risk is much lower.
The thing is, this means that the finance company is going to want to know some details about the car you’re buying – since they might need to recover it and sell it in the worst-case-scenario. Generally, they’ll be able to gather all the information they need about the car from the registration mark – or, if you’re buying a new car, the make and model details.
We know that a finance company is going to take a look at your credit rating and the details of the vehicle you’re going to buy – so is that it?
Not quite – there’s a little more needed.
While this information helps them understand the likelihood of something going wrong – and what they can do about it if it does, it doesn’t let them know anything about your current personal circumstances.
As such, you’ll need to provide some information when you apply for finance, including:
- Your current employment/income details
- Your address/living arrangements
- An idea of your incomings/outgoings
With this information, the finance company will be able to calculate how much they can reasonably expect you to repay. For instance, a £200 monthly payment for someone who earns £2,000 a month is much less likely to cause a problem than a £700 payment for someone who earns £800.
Of course, your application will also show the loan amount – another crucial piece of information that the finance company will consider. Again, borrowing £5,000 to help you buy a £20,000 vehicle represents less of a risk compared to say borrowing £19,000 to buy the same car.