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Lending Criteria For Loans

published  First Published: 08/06/2011
Article written by: Nigel Brookson


Lending criteria for loans used by loan lenders is useful to know when making an application for personal loans, car loans, home loans and business loans Australia wide.
Every lender regardless of the loan type has a lending criteria they use to assess the loan application which is then point scored to determine whether to grant the loan; or not. Every lender will have their own bias to different factors, and point score them differently, but they all use the basic lending criteria for loans.

The lending criteria is often referred to in the finance industry as the 6 C of credit assessment; originally documented by Nigel Brookson, and are the foundation of all manual and computer assessments that decide whether an application for finance is approved or declined.

It is worth pointing out at this stage that all applications made online are assessed by a computer program that gathers the information you enter, plus in many cases accesses your credit file to determine your credit history, then supplies you with an answer. This answer will be one of three outcomes; the loan application will be approved, declined, or referred to a lending consultant who will manually look over the application, and possibly call you to gather more information before making a decision. In the case of the application for finance being declined there is no recourse. You will not know why the loan was declined and often the only statement made by the system; if you applied online, or from the loan consultant if you applied over the phone or in person will be "You don't meet our lending criteria". This is deliberately vague, and does not help you know why not, but continuing to question the lenders staff will be in vain as they do not know exactly how their system point scores the applications, and unless they see something that stands out as a problem, will not be able to let you know why.

Some lenders will promote their business to groups of people that have particular loan needs not catered for by main stream lenders like banks such as payday loans. Some will focus on loans to a particular demographic such as loans for people on a pension, and other lenders may focus on loans for people with bad credit, so it is important when approaching a lender that you know what type of loan you need, and what type of loan the lender specialises in as well as the lending criteria for loans type you are interested in.


There are subtle differences in the lending criteria for different types of loans.

What is the Lending Criteria for a Loan?

So what is the lending criteria for a loan? Knowing what the lending criteria is used by loan lenders is a good place to start. There are basically 6 lending criteria used to assess an application for a loan.

  1. Capital - the customers asset to liability position

    • Were any assets gained through savings or finance?
    • Is there a reason why the customer is Asset poor?
    • Is there a valid reason for the customer renting, at a later stage in their life?
    • What are the customers spending habits, as they appear on their bank statements?

  2. Capacity - can the customer afford to make the repayments on a loan?

    • Has all income been considered? Is there other income (consistent overtime, regular bonuses, acceptable centrelink, add backs or one of expenses for self employed)?
    • Can payments be reduced (more deposit, less or lower insurance premiums, lower rate, longer term)?
    • Will tax returns or financial statements provide the consistency of income?
    • Add spouse to application to increase income?

  3. Credit - What is the history with passed loans?

    • Will further proof assist? (bank statements, written reference, trade references, landlord reference, mortgage reference)
    • Will further explanation assist?
    • Will a specific contact person, at the creditor with a credit problem, assist with further confirmation and clarification?
    • An overall slow rated account may have been good for the last 12 months.
    • Extraordinary explanations for a previous credit problem.
    • High number of enquiries for credit on credit file - considered credit shopping.

  4. Collateral - what is the market value of the car?

    • Has security been described correctly?
    • Has security been valued correctly?
    • Have all accessories / options been valued?
    • Is there any more cash deposit available?
    • Shorter term to provide earlier equity?
    • Different goods, that value better?

  5. Character - stability in employment and residence

    • Is employment consistent even though not stable?
    • Is employment consistent with occupation / qualifications?
    • Is residence instable because of employment?
    • Will a Guarantor strengthen the customers character?
    • Are we aware of a future change that will provide support? (e.g. pending promotion)
    • Studying to improve qualifications?

  6. Conditions

    • These are mostly outside your control; such as the lender having knowledge that the company you work for has filed for bankruptcy, or a government agency has flagged your name in relation to criminal enquiries etc.


Lending Criteria For Personal Loans

The lending criteria for personal loans will depend on whether the personal loan you are looking for will be a secured personal loan or an unsecured personal loan. The lending criteria for unsecured personal loans will be the most stringent. The credit history of the applicant will be looked at closely, and because this type of loan carries the most risk to a lender, any defaults, no matter how minor they may be, or what the reason for the default was, will be viewed by many unsecured lenders as too risky resulting in the application for credit being declined. Most people do not know what is on their credit file, so it may be a good idea to get a copy of your credit file by visiting My Credit File Report where you not only receive a copy of your credit file, you receive a personalised comprehensive credit file report on your credit worthiness and likelihood of an application for credit being approved before you apply. This can avoid you from adding unnecessary enquiries on your credit file making it even harder for you to find a lender to say yes. People who have credit issues can still find lenders who will look at bad credit loans.

Personal loans lending criteria is also looked at closely in the other areas by personal loan lenders to see if the applicant is transient; i.e. a flight risk. If the applicant defaults on the loan, what are the chances the lender will be able to chase them for the money? Some one who has had say 5 addresses in 5 years, and/or 5 jobs in 5 years as an example will be considered transient and too risky for many lenders to approve.

Lending Criteria For Car Loans

Lending criteria for car loans is similar to the lending criteria for secured personal loans. Due to the added security with this type of personal loan, lenders are often more accepting of small defaults, that generally have a fair reason for happening. Lenders may ask for additional deposit which reduces the amount of the loan as one of the lending criteria conditions they apply before they give final approval. Car loan applications are made by tens of thousands of people a year in Australia and there are many lenders who lend money for car loans so it is worth making a car loan comparison between a few before making a car loan application, as they will have slightly different lending criteria for car loans that may preclude you with your current circumstances.

Lending Criteria For Home Loans

Lending criteria for home loans is more relaxed than the lending criteria for personal loans. Home loan lenders take the home as security, so are in a strong position; it's not like anyone can move the house so it can't be found. Defaults can be forgiven especially if there will be substantial equity in the home, and if good savings history is demonstrated by the applicant. Banks are the traditional home loan lenders with more conservative home loans lending criteria, but there are also finance companies in the market that lend money for home loans particularly for people with a bad credit history, i.e. bad credit home loans.

Lending Criteria For Business Loans

Lending criteria for business loans Australia wide is tougher because there is more risk carried by business loan lenders for business loans. Lenders lending money for business ventures including start up capital or investment in stock look for past or proven performance; i.e. the ability to turn the advanced money into more money by making a profit. Business loans lending criteria looks at the directors of the company or proprietors of a business to see if they are stable and have past good credit.

Bad Credit Loans

Bad credit loans are loans by lenders that do not focus on past credit issues as much when they weigh up whether to lend their money. There is a very large market for bad credit car loans especially with finance companies that look at an applicants current situation and their ability to make the loan repayments rather than past credit problems. There are many car loan lenders Australia wide advertising bad credit car loans, so before applying compare car loans with several car loan lenders before making an application for a bad credit car loan. Bad credit personal loan lenders can also forgive past credit problems, and if there is no security will look at smaller loan amounts.

Payday Loans

Payday loans are generally loans with a very short loan term, often weeks or months as opposed to other types of loans with a loan term of years. Lending criteria for payday loans is quite relaxed in comparison to the other types of loans but for this reason the amount lent is often quite small, usually under one thousand dollars.

Pensioner Loans

Strictly speaking there is no such loan type as a pensioner loan. The term 'pensioner loans' is used by people on a pension looking for personal loans. Pensioner loans are catered for by lenders that lend money to people on a pension such as Centrelink and their lending criteria generally dictates that small amounts are lent because of the applicants low income.


When looking at the lending criteria for loans in Australia you will find that many lenders also encourage insurance products to be included within the loan to further protect themselves and make the application stronger. This loan protection insurance can cover the repayments of a loan in many situations such as being off work for extended periods of time due to an accident or sickness, loss of your job, and even passing away, so take time to read more about this when examining the lending criteria for loans.


Related Article: Why Use A Finance Broker?, Why Savings is Important for Personal Loans, What to do if you are Declined Credit, Payday Loans - Are They For You?, Debt Consolidation Loans, Credit Repair Tips, 7 Steps to the Best Car Loan


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Comments made on Lending Criteria For Loans

Mike Weston
16 Jun 2011 02:06:11

It is definately important to know the lending criteria for loans before applying; especially for a car loan. Lending criteria for car loans also seems subject to how the lenders are doing for that month. If business is slow they often approve loans at the end of the month they wouldn't if presented in the first week.