If you’re in the market for a new car then you’re also probably looking to get a car loan as well. Unfortunately, some people have a harder time securing a loan than others.
This is partly due to their credit score, but it goes beyond that. Lenders take a number of factors into consideration before financing a car loan for someone.
So, just how do lenders determine whether you’re eligible for a loan?
There are five primary factors that determine whether a lender will give you a loan. They’re what’s known as the five C’s of credit.
Character
The first C is character (sometimes referred to as credit history). This mainly refers to your previous bill payments and loan repayments.
Lenders want to know that you have a history of paying your bills on time and repaying any loans you might have taken out. If you have a good track record of making your payments on time and in full it will have a very positive effect on your credit.
Lenders will also review your history for any bankruptcies, liens and collection accounts.
This information is what’s used when determining your credit score. It’s a number between 350 and 850 that lets lenders know what kind of risk you carry as a borrower. The higher the score the lower your risk is.
However, this information and your credit score are just one factor in determining your creditworthiness.
Capacity
This refers to your ability to actually repay the loan. When determining this, lenders will consider your current debt and measure that against your current income. It’s what’s known as your debt-to-income ratio. The lower your ratio the more confident lenders will be in your ability to pay back the loan.
In addition to measuring your debt and income, your job history will also be examined. The longer you’ve been at your job, and the better job stability you have, the better your capacity is determined to be.
Capital
Capital is just another term for your net worth. This is calculated by taking the value of your assets (your house, your car, your investments etc.) and subtracting your debts. The higher your net worth is deemed to be the less risky you will appear to be to a lender.
Capital can also refer to any down payment you make towards the loan. When it comes to securing a car loan, any money you can pay for the vehicle upfront will increase your chance of securing the loan. Not only will it make the loan smaller, it’s also a positive sign to the lender that you’re serious about paying the money back.
Collateral
Collateral is an asset the lender can take possession of if you fail to repay the loan. It’s a way for lenders to protect themselves if you aren’t able to pay them back.
In the case of a car loan, your car is the collateral. If you default on your loan the lender can take possession of the car and sell it to try and get their money back.
Being able to put up collateral, like a car, will make lenders more willing to give you a loan.
Conditions
The conditions of the loan refer to the interest rate and the amount you’re borrowing from the lender.
Lenders will also want to know what you intend to use the money for. Lenders are far less likely to give a loan to someone if they don’t know what the money will be spent on.
In the case of a car loan, a condition of the loan is that the money must be used to purchase a vehicle.
Other conditions, such as the current economic climate, may also be taken into consideration
Conclusion
Every lender will have slightly different criteria when evaluating a potential borrower, but this list should give you a good idea of what you will be judged on.
If you have any questions about securing a car loan feel free to get in touch with us. Our customer support team is available 7 days a week and is always happy to assist you.