What a lender must check before a car loan

Before a licensed lender enters a consumer car loan, the National Consumer Credit Protection Act requires it to make reasonable inquiries about what the borrower wants from the loan and about their financial situation, take reasonable steps to verify that situation, and assess whether the loan will be unsuitable. ASIC’s guidance on those duties, Regulatory Guide 209, uses car loans for several of its examples, and they show what the checks mean when the thing being bought is a car.

General information

General information, not financial or legal advice. It explains what the law asks of lenders, not whether any loan suits anyone. This page stays with what the duties mean for a car; ASIC’s responsible lending page is the regulator’s own starting point.

Who the duty sits with

ASIC describes the key concept this way: a credit licensee must not enter into, suggest, or help a consumer apply for, a credit contract that is unsuitable for that consumer. ASIC’s list of the obligations includes a preliminary assessment by a licensee providing credit assistance and a final assessment by the credit provider. The test of unsuitability in the Act is whether, at the time of the assessment, it is likely that the borrower could not meet the obligations, or could only meet them with substantial hardship, or that the contract will not meet their requirements or objectives.

Moneysmart puts the consequence plainly: “Even if you feel confident you can repay the loan, a lender must decline it if their assessment shows it could cause hardship.”

The two fields a lender fills in, for a car

The Act names two things to inquire about: the consumer’s requirements and objectives, and their financial situation, which must also be verified. ASIC’s guide gives car-shaped examples of both.

Requirements and objectives

Knowing the money is for a car is not enough. RG 209 cites a Federal Court case in which it was not sufficient that the licensee knew the consumer needed finance to buy a motor vehicle, because key features had not been discussed with the consumer before the contract was entered: the amount of credit, the interest rate, the total interest, the number and amount of repayments, the fees and the brokerage financed in the loan.
Features count. ASIC’s guide says significant features of a product may need to be weighed against the consumer’s requirements and objectives, and uses a car loan’s balloon payment as its example (below).

Financial situation

The costs of owning the car. ASIC says that for a car loan the lender needs to consider whether car expenses such as registration, insurance, maintenance, petrol and parking will be materially different from the borrower’s current travel costs, such as public transport.
Verification, not just inquiry. The Act requires reasonable steps to verify the financial situation, separately from asking about it.

ASIC’s example 35: a balloon payment

A lender arranges a car loan with a substantial balloon payment, and its records do not explain why. ASIC says the loan would not meet the consumer’s requirements and objectives if they wanted to own the car outright at the end, and it was reasonable to expect they could not pay the lump sum. It may meet them if the consumer wants lower repayments for most of the term and expects to sell the car for enough to cover the final payment.

Moneysmart’s car loans page explains how a balloon payment works and why it generally raises the total cost of a loan.

ASIC’s example 14: a loan in one name, a car in another

In ASIC’s illustration, Sally and Kevin are buying a car and arranging finance with the lender through the dealer. The car will be in Kevin’s name, but he was told he would be refused a loan, so Sally is asked to apply and will be the sole borrower. ASIC says the lender would likely need to find out whether Sally understands that every repayment obligation will be hers, even though the purchase does not benefit her.

The business-use box

The Credit Code covers credit provided wholly or predominantly for personal, domestic or household purposes (and some residential investment property), and the responsible lending duties above are about credit contracts of that kind. A car can be used for both. Where credit buys goods used for different purposes, the Code takes the predominant purpose to be the one the goods are intended to be most used for.

A borrower may be asked to sign a declaration that the credit is for a business purpose. The Code presumes such a declaration is right unless the contrary is established, but makes it ineffective if the lender, or a person of a prescribed kind, knew or had reason to believe, or would have with reasonable inquiries, that the credit was really for a personal purpose. Inducing someone to make a declaration that is false or misleading in a material particular is an offence carrying up to 2 years’ imprisonment.

What ASIC saw in car lending

Valuation. ASIC found the purchase price of financed cars was often significantly higher than the lender-verified “book value”.

Early defaults. ASIC Commissioner Alan Kirkland said that if a large proportion of customers fall behind early, “it raises serious questions about whether those loans were appropriate in the first place and how lenders conduct their affordability checks.”

Penalties. In April 2026 the Federal Court ordered a car lender to pay $1.55 million in penalties for breaches of its responsible lending obligations in car finance it provided to vulnerable consumers.

The assessment, and a refusal

A borrower can ask the lender for a written copy of its assessment, before the loan is entered or for up to 7 years after, and the lender must not ask for payment for it.

Where an application is refused, Moneysmart says lenders have to tell the applicant if the refusal was because of their credit report, and it suggests checking the report for mistakes before applying again. Moneysmart’s credit reports page explains how to get a free copy.