Why do Lenders Need to Check My Credit When I Apply for a Car Loan?

Posted on Friday, March 6, 2015 - 14:46

If you’ve never applied for a car loan before, the lender or broker will always conduct a credit check. They use automated tools to view your credit history and assess whether they will lend money to you. Sometimes you’ll also have to bring supporting documents like payslips, residential history or bank statements. That seems like a lot of information. So why do they perform the extra check?

A three-part check

Usually lenders and financiers will do three checks to prove that you are suitable for lending to, or “creditworthy.” Creditworthiness is determined by:

  • Being over 18;
  • Having a good financial standing, and;
  • Your credit history.

The last two parts of the check are the most important. Car loan lenders will ask for as much supporting documents as possible to determine your risk profile.

Risks and rates

People who seen as lower risks are much more likely to get finance approved.  Low risk applicants are more likely to repay the loan on time and in full. Banks and lenders offer people with good credit “mainstream” or “prime” lending rates. Higher risks might only be eligible for “sub-prime” or “bad credit” loans with significantly higher interest rates. “no credit check” car loans attract these rates. You often see these loans come with longer terms and mandatory securities (i.e., your car as collateral.)
Credit histories Your credit history shows your lender or financier how many times other lenders or companies have done checks on your credit, whether you’ve been rejected for finance or that you have defaulted on any of your loans. Your credit file will also include any bankruptcies, court judgements or writs against you.
All of this gives your financier a better picture of your financial history and your financial future. Responsible lenders do not lend to people who might experience financial hardship based on their credit history.

What if I don’t have a credit history?

You may not think you have a credit history, especially if you are younger. If you have ever forgotten to pay back a phone or internet bill on time, this may be on your credit history. If your bank issued you a credit card when you turned 18, this would show up on your credit file.

Checking your credit history before your lender does

If you’re unsure what might be on your credit history, it’s a good idea to get a hold of your credit file. This service is usually free, and takes about ten business days to come back. That way you can see if you have any defaults or rejected applications. It’s also good to see if your credit history has any errors, which you must fix yourself. Fixing errors before applying greatly helps your chances of gaining approval.

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