How lenders assess your loan application

  • Understand the most common reasons for loans being declined
  • Find out what lenders love to see
  • Plus how to get the lowest rate you can
First home buyers home loans
First home buyers home loans

In this guide:















Having a loan application declined is not the end of the world. But it does mean time wasted on the application and missing out on the purchase the loan was intended for.

Most importantly, it can also damage your credit score.

I’ve worked with dozens of Australian lenders. I know what they like and what they really don’t like. Let’s take a look.

How do lenders assess loan applications?

How do lenders assess loan applications?

All finance approvals are based on risk. Understanding how lenders assess risk in your loan application can be the difference between your loan being approved or declined.

It can also determine how much you’re able to borrow and what interest rate you get.

Lenders use advanced financial technology to assess loan applicants. You can’t fake being low risk.

But you can take steps to improve your application before submitting it to a lender. You should also understand when not to apply.

Why do lenders decline loan applications?

Lenders assess loan applications against their 'knockout rules'. Basically these are the factors that will cause your application to be declined straight away.

These are standard knockouts rules for most lenders:

  • Being under the age of 18
  • Being unemployed with no income
  • Not being an Australian citizen or permanent resident
  • Being currently bankrupt
  • Intended illegal use of the funds
  • High percentage of gambling in your bank statements
  • Large number of defaults or dishonours

Each lender will also have its own unique knockout rules, which can include:

  • A 'bad' credit score below their minimum approval limit
  • Too many loan applications recorded on your credit history
  • Inability to provide sufficient documentation
  • Current living situation
  • Current employment situation e.g. self-employed
  • Number of existing loans
  • Loan type e.g. some kinds of debt consolidation loans may not be eligible

If your loan application passes this initial stage, the lender will begin to assess the details of your application.

Loan purpose affect application

How does the loan purpose affect your application?

Lenders will then look at your intended use of the funds.

For example, if you intend to use the money to buy an asset (like a car), this is a lot less risky than using it to pay bills or outstanding debts.

There are two main reasons for this:

  • If you’re buying an asset, it can be used to secure the loan
  • The loan purpose paints a picture of your overall financial situation. Borrowing to renovate your home is a choice, repaying outstanding debts is a necessity.

If you’re approved for the loan, the purpose of the funds can also impact the interest rate and the amount you can borrow.

  • Secured loans come with lower rates and higher maximum loan amounts
  • Unsecured loans have higher interest rates and a lower borrowing limit

According to personal loan statistics compiled by based on real loan request data, home improvement loans (11.47% p.a.) attract the lowest average interest rate, while loans taken out for the purpose of investing (19.77% p.a.) have the highest rates, on average.

How lenders view servicing on loans

How do lenders assess loan serviceability?

Serviceability is the term lenders use to describe your ability to afford the repayments on the loan, both currently and over the entire duration of the loan.

A lot of loan applicants misunderstand how this is determined. It’s not just based on your income.

Essentially, your ability to service a loan will come down to these main factors:

  • Your desired loan amount
  • The interest rate
  • The loan term
  • Your income
  • Your employment stability
  • Your other expenses
  • Your other debts and credit limits

Serviceability case study

Let’s consider two example borrowers to illustrate how serviceability works:

  • John and Jane want to each borrow $30,000
  • Both are paid the same amount and can afford the repayments based on their income
  • Both have a decent credit score
  • John applies and is declined
  • Jane applies and is approved

Now let’s look closer at what separates John and Jane, and their ability to service the loan in the eyes of lenders.

John’s situation in more detail

  • Has been in his job six months
  • Wants to borrow the money for seven years
  • Has three credit cards with no outstanding debt BUT $20,000 in available credit
  • Was previously unemployed and his longest employment is 12 months

Jane’s situation in more detail

  • Has been in her job for five years
  • Wants to borrow the money for three years
  • Has one credit card with $2,000 of available credit and no outstanding debt
  • Has consistently progressed in her career and income since graduating university

The 5 Cs of risk assessment for loan applications

We can summarise what lenders look at when assessing loan applicants through the 5 Cs of risk.

Many lenders use these exact steps when filtering applications.

Collateral is any valuable asset you can offer as security on the loan.

1. Collateral

Collateral is any valuable asset you can offer as security on the loan.

If you can’t repay your loan, your lender can take ownership of the asset to sell and reclaim their losses.

Even if you’re capable of repaying the loan amount comfortably, offering security can be one of the simplest ways to reduce the interest rate on your personal loan.

Capital is your personal assets and their value.

2. Capital

Capital is your personal assets and their value. This can be money in a savings account, shares, any other valuable belongings you could sell to help repay the loan if you lost your income.

Character refers to factors like your personal spending, how you manage your money and your credit rating

3. Character

Character refers to factors like your personal spending, how you manage your money and your credit rating.

Lenders get most of their insights into your character from your credit score and bank statements.

For example, a borrower who regularly withdraws all of their salary on the day they are paid may appear to a lender to be financially unstable and riskier as a result.

For bad credit loans, lenders will do an even deeper dive into your credit history.

Loan application capacity.jpg

4. Capacity

Capacity broadly covers your ability to repay the loan amount.

Quite simply, this is whether your income (after your other expenses are taken out) is high enough to cover the repayments for your loan amount over the term you’re applying for.

Loan application conditions

5. Conditions

Conditions refers to anything else relevant relating to the loan, your situation and even wider economic conditions.

For example:

  • What is the loan being used for?
  • What interest rate are you eligible for?
  • Is your employment and living situation stable?
  • Is the industry you work in stable?
  • Is the broader economy doing well?

What documents will lenders want to see?

The lender isn’t going to take your word for the fact that you’re financially fit as a fiddle.

You’ll be asked to provide supporting documents to support your loan application.

This could include:

  • Payslips
  • Bank statements for all of your accounts (including credit cards)
  • Statements for other loans you have

If you can’t provide the standard documents, you may need to consider a low doc personal loan.

Lenders will need to review your banking conduct

What are the red flags on bank statements?

Lenders lok closely at bank statements for a snapshot of your financial health.

They’ll look at things like:

  • The percentage of your income spend on gambling
  • The percentage of your income you withdraw on payday
  • The number of existing debts and repayments (including buy now pay later)
  • The number of failures in paying existing or previous debts
  • The amount of money you have left over after you pay your bills and needs
  • The number of accidental overdrafts and any fees associated
  • Any debt collection or ministry of justice fines
  • Any benefit or Centrelink emergency payments

Checking your loan eligibility

By now you should have a good idea of what lenders look for when assessing loan applications.

But if you want to be able to see at a glance which lenders you qualify for and at what interest rates they offer you based on your circumstances, you can try Money Matchmaker®.

It’s a free tool that asks you some simple questions, then shows you loan offers from lenders you match with. There’s no obligation and checking your rates does not affect your credit score.

Written by

Shaun McGowan founder

Loans Expert

Shaun McGowan

Reviewed by

Sean Callery Editor


Sean Callery