Purchasing a car is an exciting milestone, but for some people, it often requires securing a car loan. However, obtaining a car loan is not always as straightforward as it may seem. Lenders consider various factors before approving a loan application, and understanding these factors can help improve your chances of obtaining favourable loan terms. In this article, we’ll explore some of the key factors that can affect getting a car loan in Aotearoa.
1. Credit History:
One of the most significant factors lenders consider when assessing your car loan application is your credit history. Your credit history provides lenders with insights into your past borrowing and repayment behavior. It includes information on any outstanding debts, late payments, defaults, bankruptcies, and the overall management of your financial obligations. Maintaining a good credit score is crucial, as it demonstrates your ability and intention to meet your financial responsibilities and increases the likelihood of loan approval.
2. Employment and Income:
Lenders need assurance that you have a stable source of income to repay the car loan. They will evaluate your employment history, income stability, and regularity. Generally, lenders prefer borrowers who have a stable employment history and have a steady income stream. A consistent employment record and a steady income indicate your ability to meet monthly loan payments.
3. How much deposit you can contribute:
The amount of money you can provide as a deposit is often an important factor in obtaining a car loan. The Loan-to-Value Ratio (LVR) is a measure of the loan amount compared to the value of the car you intend to purchase. Lenders typically finance a certain percentage of the vehicle’s value and require borrowers to cover the remaining amount as their contribution (i.e. your deposit).
A larger deposit reduces the loan amount and demonstrates your commitment to the purchase. Lenders often view a larger deposit positively, as it lowers the risk associated with the loan. Saving up for a substantial deposit can help increase your chances of loan approval and may also result in more favourable interest rates.
4. Debt-to-Income Ratio (DTI):
The Debt-to-Income Ratio (DTI) is a measure of your total debt obligations compared to your income. Lenders analyse this ratio to determine your ability to handle additional debt. If you have a high DTI, it suggests that a significant portion of your income is already allocated to existing debts, which may raise concerns about your ability to manage additional loan repayments. Maintaining a low DTI by managing your existing debts responsibly can help improve your chances of getting a car loan. However, it is important to note that lenders are obligated to fulfill their responsible lending obligations, which encompass taking reasonable steps to verify a consumer’s financial situation and ensure that any proposed lending will be affordable and suitable for their needs..
When applying for a car loan, it’s a good idea to understand the factors that can affect your chances of approval. Maintaining a good credit history, having stable employment and income, managing your debt responsibly, and having a deposit can all improve a car loan being approved. By considering these factors and doing your research, it will help put you in a better position to secure a car loan that suits your needs and financial situation and make your goal of owning a vehicle a reality.
Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion, and seek independent guidance.
