When you’re looking to buy a car in the UK, securing car finance is often a key part of the process. Whether you’re opting for a personal loan, hire purchase (HP), or personal contract purchase (PCP), lenders will carry out a series of checks to assess your eligibility. These checks are designed to ensure you can afford the repayments and to minimise the risk of default. In this blog, we’ll explore the key checks done for car finance in the UK and what you can do to prepare.
1. Credit Check
One of the most important checks carried out by car finance providers is a credit check. This involves reviewing your credit report to assess your financial history and how well you’ve managed credit in the past. Lenders will look at factors such as:
- Credit score: A higher score indicates you’re a lower-risk borrower.
- Payment history: Late payments, defaults, or CCJs (County Court Judgments) can negatively impact your application.
- Credit utilisation: How much of your available credit you’re using.
- Length of credit history: A longer history can work in your favour.
If you have a poor credit score, you may still be able to secure car finance, but you might face higher interest rates or need to provide a larger deposit.
2. Affordability Assessment
Lenders are legally required to ensure that you can afford the repayments without putting yourself in financial difficulty. To do this, they’ll assess your income and outgoings. This typically involves:
- Proof of income: You may need to provide payslips, bank statements, or tax returns if you’re self-employed.
- Monthly expenses: Lenders will look at your regular outgoings, such as rent, bills, and other loan repayments.
- Debt-to-income ratio: This measures how much of your income is already committed to debt repayments.
The goal is to ensure that the car finance repayments are manageable within your budget.
3. Identity Verification
To prevent fraud and comply with anti-money laundering regulations, lenders will verify your identity. This usually involves providing:
- Proof of identity: Such as a passport or driving licence.
- Proof of address: A utility bill, bank statement, or council tax bill from the last three months.
Some lenders may use electronic verification systems to speed up this process.
4. Employment Status
Your employment status is a key factor in determining your eligibility for car finance. Lenders want to see that you have a stable income to cover the repayments. They may ask for:
- Employment history: Some lenders prefer applicants who have been with their current employer for a certain period (e.g., six months or more).
- Contract details: If you’re on a fixed-term contract or self-employed, you may need to provide additional documentation.
If you’re retired or receive benefits, you may still be eligible, but the lender will assess your income differently.
5. Vehicle Checks
While most of the checks focus on you as the borrower, lenders will also carry out checks on the vehicle you’re planning to finance. These include:
- Vehicle valuation: The lender will ensure the car’s value aligns with the loan amount.
- Mileage and age: Some lenders have restrictions on the age or mileage of the car.
- Condition: For used cars, the lender may require an inspection to ensure the vehicle is in good condition.
If you’re buying from a dealership, they’ll often handle these checks on your behalf.
6. Deposit and Loan-to-Value (LTV) Ratio
The size of your deposit can influence the lender’s decision. A larger deposit reduces the amount you need to borrow, which can make you a more attractive borrower. Lenders will also consider the loan-to-value (LTV) ratio, which is the percentage of the car’s value that you’re borrowing. A lower LTV ratio is generally seen as less risky.
7. Previous Finance Agreements
If you’ve had car finance before, lenders may check how well you managed those agreements. If you missed payments or defaulted, it could affect your current application.
How to Improve Your Chances of Approval
If you’re worried about passing these checks, there are steps you can take to improve your chances of being approved for car finance:
- Check Your Credit Report: Before applying, review your credit report for any errors and take steps to improve your score if necessary.
- Save for a Larger Deposit: A bigger deposit can make you a more attractive borrower and reduce the amount you need to borrow.
- Reduce Existing Debt: Paying off other debts can improve your debt-to-income ratio.
- Stick to One Application: Multiple applications in a short period can harm your credit score. Use eligibility checkers to see your chances without a full application.
- Choose the Right Lender: Some lenders specialise in bad credit car finance, so do your research to find one that suits your circumstances.
Final Thoughts
Securing car finance in the UK involves a series of checks designed to protect both you and the lender. By understanding what these checks involve and taking steps to improve your financial profile, you can increase your chances of being approved. Whether you’re buying a new or used car, being prepared and informed will make the process smoother and help you drive away in your dream car with confidence.
If you’re unsure about your eligibility, consider speaking to a financial advisor or using online tools to compare car finance options. With the right preparation, you’ll be well on your way to securing the finance you need.
