What checks are completed when you take out car finance?

The majority of Brits buy new cars through finance agreements to spread the cost over a number of months. This allows them to drive a new car off the forecourt of a dealership without buying the car outright.

If you’re reading this article you have probably identified car finance as the best way for you to buy a new car, and are already aware of everything you need to know about car finance and the different types of car finance available. But, did you know that car finance companies perform various checks to ensure you are a responsible borrower?

The most common checks for car finance include a credit check and a financial assessment. You’ll also need to supply proof of identity and various other pieces of documentation.

Read on to find out what checks are done for car finance and what documents you will need when you apply.

Proof of identity

To ensure you are who you say you are and not committing fraud, car finance companies will request the following personal information:

• Full name (and any previous names)
• Date of birth
• Marriage status
• Residential status

A copy of your driving licence can act as proof of identity, although some providers may require more supporting information.

Proof of address

As part of your proof of identity checks, car finance companies will request details of your address history for a minimum of three years.

It’s crucial that you are as accurate as possible when detailing your address history, especially if you are a renter and you have moved around a lot. Something as seemingly insignificant as an inaccurate address detail can derail your application, even if your credit history is spotless and you pass your financial assessment with flying colours.

You will typically be asked to supply two forms of proof of address too. Utility bills — gas bills, water bills, council tax — and bank statements are usually acceptable forms of proof.

You will need to be named on the proof of address that you supply and the documents will need to be from the last three months.

Income

To make sure you will be able to afford the repayments, car finance providers will want to check your income. They may be able to get this information from your employment details, but they may want to look at your payslips or your previous bank statements to check your income and expenditure.

If you are self-employed or have a more irregular income, car finance providers may ask for more evidence to prove that you will be able to afford the monthly car finance payments.

Employment history

Car finance providers will request your employment details and how long you have been employed by your current employer. You will need to supply your job title and current salary.

The self-employed will need to provide details from their accounts, which may require 3 years of summary accounts called SA302’s.

Driver’s licence

As you are applying for car finance, it’s important to provide proof that you have the legal status to drive. Without a valid driver’s licence, most financing companies will reject an application.

If you have lost or misplaced your licence, or it is being held by the DVLA, you will need to provide another form of ID, probably your passport. The financing company will then confirm with the DVLA that you have a valid licence.

If you only have a provisional licence then you may find it more difficult to get car finance, although it is still possible. There are some car finance providers that will accept a provisional licence, but there may be some restrictions such as a limit on how much your new car can cost.

Credit check

When applying for car finance, finance companies will perform a credit check. A credit check plays an important role in determining whether you will be approved for finance and the rates you’ll be offered.

Before applying it will help if you know your credit score, as this will ensure you have a good idea of how likely you are to be accepted by different lenders. Applicants with poor credit might be best placed to apply to lenders that specialise in offering finance to drivers with bad or limited credit histories, however, finance companies will charge higher levels of interest to ease their risk for these borrowers.

There are two main types of credit check: soft and hard.

A soft credit check is an exploratory look at your credit history. It only accesses limited, specified information on your credit report. Soft checks do not affect your credit profile.

A hard credit check gives finance companies full access to your credit report and it leaves a permanent trace on your credit file. You should aim to limit the number of credit requests you make over a short time period — try to leave at least 12 weeks between hard credit checks — otherwise lenders may become worried about your financial responsibility and consider you a risky borrower.

» MORE: How to check your credit score

When are car finance soft credit checks carried out?

Typically, soft credit checks are made initially to ensure that you are a responsible borrower. Finance companies will be particularly keen to see how you manage any loan repayments, and what your debt history looks like. Unlike a hard credit check this won’t leave a mark on your credit report. A soft check will enable you to be approved for an agreement in principle.

This simply means that a lender will be willing to lend to you providing you meet all their lending criteria, including financial affordability checks.

When are car finance hard credit checks carried out?

A hard credit check will be performed after you have an agreement in principle with a credit company, when you’ve chosen the deal you would like and have agreed to go ahead with it. Now, a visible mark will be left on your credit file, so be sure that the deal you’ve agreed to is suitable.

If not, you may need to continue shopping around for a better deal. Before applying to any company for credit, ensure you are aware if and when they will perform a hard credit check. Credit companies should inform you at which stage in the application process they carry out hard credit checks.

How long does a credit check take for car finance?

A check will be run on your credit report as part of the finance company reviewing your application. This process usually takes between one and two days.

Can I get car finance without a credit check?

Because car finance is a form of credit, all car finance companies will conduct a credit check as part of your application. They will want information about your credit history so they can assess how risky it would be to lend to you and determine the interest rates on your finance if they approve your application.

Will I get accepted for car finance?

Each lender and car finance product is different. Being rejected by one provider does not mean you will be rejected by all car finance providers. To improve your chances of approval, ensure you know the lending criteria of the provider, research your credit score and understand how it could affect your eligibility for a lender’s individual products before applying to them.

It’s also important that you provide up-to-date and correct information throughout your application, including proof of identity, address, employment and financial details.

If you know you have poor credit it can be worthwhile to rebuild your credit history before applying to car finance deals. Yes, deals are available for borrowers with poor credit, however lenders will attempt to mitigate their risks with higher interest rates.

Always be truthful in your submissions, any falsehoods in your application could lead to you being blacklisted by car finance companies.

How long does it take to get car finance?

In an ideal scenario borrowers can be approved and have the funds transferred into their account on the same day. However, don’t assume that you’ll be able to arrange a deal from the car showroom and drive off a few hours later.

Typically it will take one to two business days for a car finance company to check your documents and financial information before finally coming to a decision on your application.

Now you know what checks you need to go through and what documents you need for car finance, you may feel ready to start your application.

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