What checks are done for Car finance UK? A comprehensive guide

Obtaining car finance in the UK is a significant financial commitment, and it’s vitally important that both applicant and lender conduct thorough checks before entering into any agreements. Car finance allows you to spread the cost of purchasing a car over a set period, making owning a vehicle more affordable.

Do your homework properly

By conducting comprehensive research into various lenders, and determining how much you can afford to spend on a vehicle instalment, you can protect yourself from unscrupulous lenders, ensure affordability, and make an informed decision that aligns with your financial goals. By doing your own affordability assessment first before applying for car finance, you can determine whether you can comfortably afford the monthly repayments. This will minimise the risk of unnecessary financial strain.

Responsible borrowing protects everyone

Lenders are committed to responsible borrowing, and conducting thorough affordability assessments is a proven way of protecting themselves against potential defaults and maintaining responsible lending practices.

Checks that are done for car finance in the UK

• Your income: Lenders evaluate your income to assess your ability to make regular repayments. Both your gross income (before deductions) and net income (after deductions) are considered. Regular employment and a stable income source are crucial for demonstrating financial stability and repayment capability. Lenders typically require proof of income, such as recent pay slips, bank statements, or employment contracts.
• Expenses: Your monthly expenses will be scrutinised to get a clear picture of your financial obligations and determine the amount of disposable income you have available for car finance repayments. Your expenses will be divided into regular expenses such as mortgage and utilities, and discretionary expenses such as leisure and entertainment, for example.
• Your current financial commitments: These include any outstanding debts or loans, such as mortgages, personal loans, credit card balances, or other car finance agreements.

These commitments will determine your overall debt-to-income ratio, which lenders use as an indicator of your ability to accommodate additional debt. You’ll probably be requested to supply information about your existing loans and debts so that your affordability can be determined accurately.

Doing the math and ticking the boxes

The finance company will conduct a proper credit check to determine whether you will be approved for finance. A poor credit score could jeopardise your chances of securing the vehicle you want. A soft credit check only considers limited information on your credit report whilst a hard credit check gives the lender full access to your credit history. A poor credit score could necessitate a hard credit check, which will leave a trail on your credit record. The higher your credit score, the better your chances are of not having to submit to hard scrutiny.

Clarity allows for financial prowess

Lenders use a number of affordability calculations to determine the maximum loan amount you can afford. These calculations consider factors such as your income and expenses, the loan term and interest rates, as well as the maximum repayment you can afford. By submitting to this affordability assessment, you’ll get a clearer picture of your financial capacity to accommodate car finance. It prevents you from overcommitting and ensures that you can manage monthly repayments comfortably without compromising your financial status.

It’s important to know which documentation is required to expedite the application process. The lender will usually provide guidance in this regard.  

Documentation includes – but isn’t limited to – the following:

1. Personal identification documents such as a photographic ID in the form of a valid passport or driving license. You’ll also need proof of address in the form of recent utility bills or council tax statements.
2. Proof of Income in the form of your last three months' worth of payslips to demonstrate regular income, as well as your employment contract. If you are self-employed you will need to provide tax returns to prove income.
3. Recent bank statements (last three to six months) that reflect your financial transactions, income, and regular expenses.
4. Proof of address history: You have to prove your residential stability.
5. Documents containing information on the vehicle such as the invoice from the dealership. It should contain information such as make, model, and registration, as well as anything else the lender should know about the car you intend to finance. Proof of insurance coverage may also be required.
6. Documents indicating your current financial commitments such as personal loan agreements, mortgages, and credit cards.
7. Some lenders may even require references - professional or personal - to support your application.

It's important to note that documentation requirements may vary among lenders and will depend on the type of finance you’re applying for.

Honesty is the best policy

You can be sure that all the information you have supplied will be subjected to a stringent verification process, in an effort to ensure accuracy and mitigate fraud risks. It’s a process of reviewing and cross-referencing information to confirm the authenticity of your documents.

They may even do background checks on you by contacting credit reference agencies such as Experian or Equifax. Your employer will probably also be contacted. Your bank account details will be verified and fraud checks will be conducted against national databases. Advanced algorithms will quickly indicate patterns or inconsistencies.

Preparation sets the stage for success

Before applying for car finance, it's recommended that you carefully consider your available budget for car finance repayments to ensure that you don’t put unnecessary strain on your finances. Here are a few things to consider when calculating your budget:

• Determine your gross monthly income comprising salaries and any other income streams.
• Calculate your fixed monthly expenses, including your debt obligations. These should be consistent each month. Also, include your variable expenses such as leisure activities. (This amount might fluctuate from month to month.)
• Subtract your fixed and variable expenses, as well as your debt obligations, from your monthly income. You’ll be left with your disposable income from which you’ll have to pay your car instalments.

It’s crucial that you set a realistic car finance payment limit so you would still be able to live comfortably. Your comfort level, financial goals and other financial priorities will determine this payment limit. Don’t forget to take additional costs such as insurance, fuel and potential repairs into consideration as well.

Shopping around is key to getting the finance you need

Remember that each lender and car finance product is different. Being rejected by one provider does not mean you’ll be rejected by all car finance providers. To improve your chances of approval, ensure you know the lending criteria of the lender and that you understand how your credit profile could affect your eligibility before deciding on a suitable finance provider.