When applying for a loan, a basic requirement of all applications is proof of income.
The two most common methods for a regular consumer are either bank statements or payslips. And sometimes both.
In this article, we’ll discuss why your payslips may be required, how they are used, and what may trigger requests for additional information from your lender of choice.
Table of Contents
Why Lenders Must Care About Proof of Income
Responsible Lending Laws
Australian lenders are required to uphold Responsible Lending Obligations under the National Credit Code.
This requires a lender to assess if a borrower can repay a loan without being placed in “substantial hardship”.
The income you earn is the source of these repayments. So documented proof of these earnings is a requirement under the law and there is no way around it. However, this doesn’t have to be a payslip – but more on that later.
They Don’t Want to Lose Money
The other more obvious consideration is that an auto lender will only lend to those who they consider capable of paying the loan back.
They will go broke pretty quickly by recklessly lending money to those without sufficient income to repay.
What Information Is Required in a Payslip?
Base Salary
Lenders want to see documented evidence that your take-home pay matches what you have stated in a loan application.
A payslip includes your most recent payment and your year-to-date (YTD) earnings. This can be important in assessing the stability of your earnings.
Inconsistencies between the two numbers are likely to be questioned so that adjustments can be made to ensure an accurate assessment of your income.
Some examples include:
- Your recent payment is higher than the average payment YTD
- Is your most recent payslip boosted by undeclared overtime or a bonus that may have temporarily boosted your earnings?
- Did you take extended unpaid leave recently that affected your earnings?
- Your recent payment is lower than the average payment YTD
- Are your YTD earnings boosted by overtime or a bonus that may have previously boosted your earnings?
- Have your work hours been recently reduced and will this affect future earnings?
Evidence of Consistent Overtime or Bonuses
Irregular income is going to be treated differently by each lender.
Some may require you to demonstrate the consistency of overtime over a long period of time if it is to be included in your loan assessment.
A payslip will not be adequate for this and additional documents may be required.
Lenders also have different policies for bonus payments. Some will exclude this entirely, others will include a set percentage, and some may include 100% if you can demonstrate consistent earnings.
This is where a finance broker can help you find the lender that is best suited for you. The higher earnings you can evidence within the lender’s policy the most likely you are to be approved for your car loan.
A broker can provide explanations along with your application for consideration by a credit assessment team. This alone can be worth its weight in gold!
ABN and Contact Info of Employer
A payslip can also be helpful to verify additional information about your employer.
Your payslip should include your employer’s Australian Business Number (ABN) and contact details to confirm the legitimacy of your employment.
While some lenders will contact your employer to verify your employment, in some cases the information on your payslip will be sufficient.
How Many Payslips Do You Actually Need?
Lender’s Document Policy
The number will vary depending on each lender’s policies. Some lenders may not require payslips at all!!
It all depends on how you will be evidencing your earnings.
If payslips are the chosen method then usually 2 or 3 payslips are sufficient – assuming there are no inconsistencies that could require additional inquiries.
Do You Need Payslips for Every Pay Cycle?
You will need a payslip for your most recent pay cycle as part of your loan application.
It makes sense to also include the period prior to that, and prior to that again if you are providing three payslips.
Documents older than 60-90 are not going to qualify for consideration with most lenders.
What If You’re Paid Weekly, Fortnightly, or Monthly?
Your payment frequency usually doesn’t affect the number of payslips you are required to provide.
It is the documented consistency that matters most. However, if a lender deems the period too short then they may request an extra payslip.
Alternatives to Payslips
Bank Statements
Some lenders do not require payslips at all! Digital submission of bank statements has become the norm with many car finance lenders over the last ten years.
Otherwise known as Screen Scraping.
This is fast, convenient, and includes evidence of your income over 90 days and other information on your expenses that a lender will use to assess your loan.
Employment Letters
In some cases, a letter from your employer verifying your income, employment tenure, and job stability can help. This is most useful if you have recently received a significant increase in salary or if you are relatively new to the job.
ATO Tax Assessment
Some lenders may require proof of irregular earnings over an extended period.
Usually, your tax assessment from the ATO for the last two financial years will be sufficient to evidence regular overtime or bonus payments that you consistently receive over the long term.
Business Activity Statement (BAS)
If you are self-employed or applying as part of a commercial loan then a payslip is less relevant.
You will be required to provide a BAS or annual tax assessment so that the fluctuations in your monthly business earnings can be properly assessed.
Conclusion
While payslips are crucial, they’re just one piece of the car loan approval process. Lenders consider multiple factors, including credit history and existing financial commitments.
Not sure where to start? Speak to our expert finance brokers here at Gusto Finance and we can help you navigate the car loan application process in no time!