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How lenders assess your loan application

Written by

Shaun McGowan

All finance approval is based on risk

And understanding how lenders assess your loan application can often be the difference between an approved or declined application.

If you are approved for your loan, understanding how lenders view your application and financial history can ensure you appear as low-risk as possible, which often equates to lower rates and repayments.

Before we dive in, it’s also important to understand that lenders use advanced financial technology to assess their loan applicants; you can’t fake being low-risk, but you can take steps to both improve your financial position and application before submitting it to a lender.

Let’s get started.

How lenders assess risk when it comes to borrowing money

Lender Knockout Rules

First, lenders will assess the application against their Knockout Rules. There are standard knockouts rules for most lenders, including:

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

However, each lender will also have their own unique knockout rules, which can include:

  • A credit score below their minimum approval limit
  • Too many multiple applications recorded on your credit history
  • Inability to provide sufficient documentation
  • Current living situation e.g. boarder
  • Current employment situation e.g. self-employed
  • Number of exisiting loans
  • Loan type e.g. debt consolidation
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If your loan application passes this stage, the lender will begin to assess the details of your application.

What you are wanting to use the funds for

Lenders will then look at your intended legal use of the funds. While this isn’t the same as determining legality, it’s still an important aspect in determining risk.

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

There are two reasons for this, which reflect the assessment process:

  • The funds are used to purchase an asset which you own and will retain significant value over time - owning an asset provides a financial backstop for lenders in the event you don’t repay your loan.
  • The intended use of the funds demonstrates a much greater personal ability to manage your existing debts and finances - buying a car is a choice, repaying outstanding debts is a necessity.

Should you be approved for the loan, the type of loan and use of funds can affect other aspects of your application, such as how the lender chooses to apply interest rates.

When choosing the right loan for the right situation, low-risk lending will have lower fees and lower interest rates (which means you’ll pay less overall), while high-risk lending will have higher fees and higher interest rates (which means you’ll pay more than you might need to).

Below is a general overview of the most common loan uses and their associated loan product.

Reason For Getting A LoanMost Commonly Used Loan

Various Use And No Collateral

Unsecured Personal Loan

Various Use And Existing Collateral

Secured Personal Loan

Various Use And Purchasing Vehicle

Secured Personal Loan

Buying A Personal Vehicle

Car Loan

Buying A Business Vehicle

Chattel Mortgage or Equipment Finance

Consolidating Debt Without Collateral

Unsecured Personal Loan

Fixed Loan Amount

Secured or Unsecured Personal Loan

Adjustable Funds As Needed

Line of Credit or Overdraft

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If your lender can offer a suitable loan product and approves your intended use of funds, the next steps involve assessing your personal details and financial history.


In a financial context, servicing is defined by your ability to repay the interest on a debt.

At this point of the loan application process, lenders will assess your ability to meet your repayments - though most applicants misunderstand how this is determined.

Servicing is, essentially, a deep-dive into an individual’s risk level, and aspects of servicing (such as the length of time you want to borrow the money for) relate directly to interest rates, repayments, and the overall cost of your loan.

How lenders view servicing on loans

Much of this relates to the famed ‘Five Cs of Credit’ which we’ll cover below, but here’s a quick napkin example of how to understand servicing assessments:

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

This is how most applicants view their personal assessment - can they afford the repayments that day.

Now let’s take a deep-dive into John and Jane, and what separates them

  • John has been in his job six months
  • John wants to borrow the money for seven years
  • John has three credit cards with $20,000 of available credit and no outstanding debt
  • John was previously unemployed and his longest employment is 12 months
  • Jane has been in her job for five years
  • Jane wants to borrow the money for three years
  • Jane has one credit card with $2,000 of available credit and no outstanding debt
  • Jane has consistently progressed in her career and income since graduating university

While these are four small examples, they illustrate the very clear difference between applicants and how lenders can apply risk to an individual in terms of probability:

Based on the information above, it’s far more likely that John could lose his job, take on an unmanageable amount of debt, return to unemployment, or risk missing payments beyond 12 months.

The Five Cs of Risk Assessment

1. Collateral

Collateral is any valuable asset you can offer as security on the loan. This means that, should you miss payments or fail to repay your loan, your lender may take ownership of these assets to sell on and reclaim their losses.

Even if you are perfectly capable of repaying the loan amount very comfortably, offering security is often one of the simplest ways to drastically reduce the interest rate on your personal loan.

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The Five Cs of Risk Assessment

2. Capital

Capital is your personal assets and their value. This can be savings accounts, personal objects, or anything that isn’t offered as security on the loan but shows a lender that, should things go wrong, you have the ability to sell on your own goods and cover their losses without the lender needing to repossess them first.

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The Five Cs of Risk Assessment

3. Character

Assessing character can be reasonably broad, but generally this will cover your personal spending, your habitual spending, how you manage your money, your credit rating, and the consistency you present with your finances.

For example, a borrower who habitually withdraws all of their pay the day they are paid may appear to a lender to be financially unstable, unable to manage their money, and less likely to repay their loan in full. Where online lenders will use your bank statements to assess your character, they will take into account your spending patterns and consistency.

How lenders analysis your character

The Five Cs of Risk Assessment

4. Conditions

Conditions will vary depending on the type of loan you get, and is generally best described as the purpose for the loan and whether the lender deems this to be a low-risk or high-risk option.

For example, you’re a motorcycle mechanic and you want to borrow $3,000 to buy a busted-up motorcycle, but you can very clearly illustrate that you’ll not only fix the bike, but be able to sell it on shortly afterwards for a profit and repay the loan in full.

This type of condition is more likely to get a favourable rate than, say, a loan used primarily to cover other debts or repay bills, where the loan isn’t used for a purpose other than to cover existing, unmanageable debts.

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The Five Cs of Risk Assessment

5. Capacity

Capacity is simply the most important factor of risk assessment and broadly covers your ability to repay the loan amount. Quite simply, this is whether you have the incoming earnings capable of meeting the required repayments for your loan amount over the period you wish to borrow it for.

The amount you can borrow, and the length of time you wish to repay the principal amount, will be determined almost entirely by your capacity.

Pay off your defaults to improve your credit rating

Bank statement KO rules

The supporting documents you’ll need to supply with your application will depend on the type of finance you’re applying for and the specific lender requirements.

Lenders will actually be looking at a lot of different information from your statements, to help them with their decision to give you a loan - the most useful of these documents is your bank statements.

Your bank statements:

  • Need to be from a legitimate Australian Bank
  • Need to be read-only and unaltered
  • Often are submitted using bank statement scrapping technology such as Illion Bank Statements
  • Must be for your primary bank account where your income is deposited
  • You may be asked to supply secondary or savings bank accounts as proof as well

Lenders use financial technology to assess your bank statements to make a final decision on your financial strength and ability to repay your loan. Below we’ll look at the most common factors that can affect your bank statement assessment.

Common Bank Statement Knockout Rules

  • The percentage of your income use for gambling
  • The percentage of your income you withdraw on payday
  • The number of existing debts and repayments
  • The number of failures in paying existing or previous debts
  • The availability of funds across your repayment period (i.e. do you spend your monthly pay in the first week?)
  • Amount of money you have left over after you pay your bills and needs
  • The number of small loans you have (less than $2k) - including Buy Now Pay Later and Cash flow
  • The number of accidental overdrafts and any fees associated
  • The number of debt collection or ministry of justice fines
  • Any benefit or Centrelink emergency payments

If you do have existing debts, your potential new lender will need to know how much you are paying each month and how much is still outstanding, so they can assess your capacity to service their loan too.

Lenders will need to review your banking conduct

What if I don’t have bank statements?

If you don’t have bank statements, lenders will need to use alternative documentation to assess your application. Applying without the standard documentation is called a ‘Low Documentation’ or ‘Low-Doc’ loan.

Applying for a low-doc personal loan may not require the standard documentation for approval, but you’ll still need to demonstrate to your lender that you can repay your loan amount. You may be asked to provide:

  • Two years of tax returns and/or notices of tax assessment from the Australian Taxation Office.
  • Any recent financial statements that show your business’s profits and losses.
  • Company Information if you are a business owner. That includes your ABN and business address.
  • Personal ID, such as a passport or Australian driver licence.
  • Proof of any other income you have i.e. rental property or investment income.
  • Recent bank statements for both your personal and business accounts.

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About the Author

Shaun McGowan from



Shaun McGowan

Shaun is the founder of and is determined to help people pay as little as possible for financial products. Through education and building world class technology. Previously Shaun co-founded and Lend.