When applying for a car loan, most people immediately think of their credit history, or credit score, as the most important factor.
However, due to a combination of government regulation and more sophisticated loan assessments, there is an increasing reliance on your bank transaction data.
A lender can learn a lot about your creditworthiness by how you manage your money day to day.
This can be of huge benefit to you if you know how it all works!
In this article, I’ll share with you some basic principles for managing your bank account so that you are presenting your loan application in the best possible way.
In This Post:
What do Lenders Use Your Bank Statements For
Lenders analyse your bank statement data to determine if you are a good credit risk or not. The data provides incredible insight into how you manage your money.
Below is a summary of the data points they will look at, and what questions they are trying to answer:
- Income data: How much are you earning?
- Transaction data: Where is your money going?
- Balance data: How quickly do you spend your income?
- Serviceability: Is there enough leftover to make the repayments on your new car loan?
If you understand the concepts above, then you are already 90% of the way there. Now you just need to know how to manage them.
What Statements Do Lenders Require
Most lenders will require 90 days’ worth of bank statements from your main transaction account.
This means the account you get paid into, and do most of your spending.
If you are using multiple accounts to manage your bills then this could slow down your application, or misrepresent your finances which could lead to a declined application.
This is one area a car loan broker can help. They will look at your statements as part of a preliminary assessment and spot any potential issues before a formal application is lodged with a lender.
You can kick off this preliminary assessment by submitting an enquiry below.
Common Mistakes
It is very common for people to utilise more than one bank account (thanks a lot, Barefoot Investor!).
This shouldn’t derail your application as long as you are transparent and not actively trying to hide things.
Some common mistakes that will hold up your application include:
- Transferring a large portion of your money to another account to pay expenses.
- All spending is done from a joint account.
Both of these scenarios limit the reliability of the data in your statements.
Critical Elements of Bank Statement Data for Car Loans
In this section, we are going to cover each of the four conclusions that a lender is going to make from the bank statements when assessing your car loan application.
Income Data
The most important question a lender will ask when assessing your car loan application is How much money do you earn?
Some lenders will rely on payslips, especially in circumstances where your income is inconsistent or you work regular overtime.
Other lenders will rely on the deposits in your bank account to verify your earnings.
If you are a regular full-time employee, then demonstrating consistent earnings will be easy. However, if you are casual or rely on commissions or overtime, then there may be some additional explanation and documentation required.
Each lender may calculate your earnings differently when there are fluctuations. Some may take the lowest payment and annualise that, which will disadvantage your application.
Others may ignore things like overtime and bonus earnings completely, whereas others may count some of these.
Pro Tips
- Make sure all sources of income are going to the same account.
- Avoid any unpaid leave through the 90-day statement period that could impact your earnings.
- Fluctuations in bonus or overtime earnings may have to be demonstrated over a longer period (e.g. your annual tax assessment over two years).
Transaction Data
Your transaction data says a lot about how much of a credit risk you are. In fact, any red flags detected in your expenditure is the quickest way to get declined.
For example, if you are depositing money into your online betting account multiple times at 3am on a Sunday morning, then this could raise the alarm that this person is a credit risk.
Or perhaps your last three mortgage repayments have reversed? Huge red flag!!
There is more to it, of course, but these are easy-to-understand examples from a lender’s point of view.
A lender will categorise your expenses into the following categories:
- Basic living expenses – Essentials like your rent, food, and utility bills.
- Discretionary expenses – Optional costs like eating out or your Netflix subscription.
- Liabilities – Your repayment obligations to other lenders.
Now, you may be thinking that you could simply spend from your savings in a different account for 90 days and you could present your expenses as almost nothing… Incorrect!
As part of the credit legislation, all lenders are required to use living expense benchmarks to check that your expenses are credible. If you underdeclare your expenses, then they will be raised anyway to a reasonable household budget level.
Where you can make a difference is with your discretionary expenses and liabilities.
Just like income, each lender will calculate your discretionary expenses differently. The best way to minimise the expenses included in your application is to minimise what you spend on unnecessary stuff in that 90-day window.
Home-made coffee, home-cooked meals, no online shopping, and no Netflix for 90 days could reduce your expenses with some lenders and make you look like a responsible borrower!
When it comes to liabilities, there is not much wiggle room unless you have a loan that will be paid out soon. You may be better off just waiting until that final payment is made before applying for a car loan.
A lender is obligated to include that repayment in your expenses, even if you only have two left to go! It’s in the legislation, so you will get no flexibility there.
If you are a BNPL or wage advance user, then stop it for 90 days!
This is a potential red flag in your transaction data, but of equal importance is its very hard for lenders to know what your repayments are, and your expenses could be overestimated.
Pro Tips
- Stop using Buy Now Pay Later, Wage Advance services, or payday loans for the 90-day statement period (ideally forever!!).
- Limit unnecessary purchases for 90 days.
- Delay your application if you are close to paying out another loan.
- Lower the limit of any Credit Cards you have.
Balance Data
Your account balance is an overlooked indicator of financial health and it may surprise you that some lenders pay close attention to this factor.
Consider the difference between someone who’s account is empty the day after payday, and someone whose balance never seems to drop below a few hundred dollars even the day before they are paid.
Which one would you prefer to lend money to?
Now think about your account and what happens on payday. If you’re anything like me, the following will happen:
- Your rent or mortgage payment comes out on the day.
- Any pending bills get paid.
- A credit card repayment is made.
Some people will also transfer money to a bill-paying account and to savings. Both are positive financial habits that can also look bad if it drains your bank account balance.
A lender needs confidence that you have enough money in your household budget to make your new car loan repayment.
If you can keep at least this much in your account at all times through the 90-day statement period, then this is a positive indicator that you can handle the car loan.
Pro Tips
- Calculate your expected loan repayment and leave this in your account at all times.
- Change the timing of transfers to savings or bill accounts to as long as possible after your pay day.
Loan Serviceability
The basic formula for calculating your capacity to service the loan is your income minus expenses minus liabilities must equal more than your loan repayment.
We have covered the importance of leaving that loan serviceability balance in your bank account so that it looks good to a potential lender.
But, there is still one missing piece of the puzzle that will vary with all lenders… The BUFFER!
This an arbitrary amount that a lender may add behind the scenes when they calculate if you can afford the loan.
A buffer could be $100, or it could be $400 a month. And you’ll need to demonstrate that you can afford the repayment + the buffer!
Lenders do this as a safety measure in case they have missed anything that could affect your ability to repay the loan.
As a result, the lender:
- Ensures that you can comfortably afford the repayments.
- Reduces the risk of an error that could lead to a breach of Responsible Lending laws.
Pro Tips
- Conduct a preliminary assessment with a car finance broker. They know the buffers required with each lender and can ensure your application is only submitted to a suitable lender.
Gaming the System
The intention of the above information is to help you manage your banking transactions rather than presenting an unrealistic version of your finances.
You still need to repay the loan, and it is not in your best interests to commit to something you cannot afford.
However, it is in your interests to avoid any red flags that could unfairly impact your loan application just because you didn’t know it would be looked at.
The general principles here are to ensure your income is maximised and consistent, minimise your expenses, and avoid any potential red flags like excessive gambling or wage advances.
Conclusion
If you have read this article and identified areas where your bank transactions may be a negative, then the good news is that you can clean them up in only 90 days or less!
If you improve your financial habits today, you can present your application in the best way possible in no time.
Our team of expert car loan brokers can also identify any red flags that may prevent you from being approved.
So no need to wait, get in touch with us today to know exactly where you stand.
