How to Get a Car Loan
If you’re looking for a new or used car and you need finance, it’s important to understand your car loan options. Buying a car is an exciting time! Read on to find out all about car loans in Australia and how you can get your finance approved.
How to get a car on finance
The Australian car loan market is very competitive. There is a HUGE number lenders out there. You have to do your research to find the best deal. Even a small difference in finance terms and conditions can make a BIG difference to your repayments!
If you don’t have the time or the know-how to research your vehicle finance options yourself, get a car finance broker to do it for you. They arrange car loans for a living and it’s their job to get you a great deal.
Can I get a car loan?
Plenty of car finance options are available. No matter what option you choose, you need to be able to afford your repayments. Your main options are:
1) a secured or unsecured car loan.
A secured car loan means you have to offer your vehicle as security to the lender. This means that the lender can repossess and sell your car if you don’t make your loan repayments.
Lenders tend to prefer newer vehicles for secured loans because they have a higher resale value. Most banks and other lenders also prefer to offer secured loans over unsecured loans.
You don’t need to offer your car as security for an unsecured loan. Although that’s a benefit, an unsecured loan (usually referred to as a ‘personal loan’) has a higher interest rate than a secured loan.
Overall, you’ll be better off taking out a secured loan because you’ll pay less over the life of your loan. Not all lenders offer unsecured car loans anyway.
2) a chattel mortgage.
A chattel mortgage is a secured loan for a business vehicle, so it’s ideal if you’re self-employed. The chattel mortgage will be registered on the Personal Property Securities Register.
3) a novated lease.
A novated lease is a salary sacrificing agreement with an employer. If you take out a novated lease, your employer makes your car repayments to your lender from your before-tax pay. This not only helps to pay off your car, it also results in you paying less tax!
Both the price of the vehicle and its running expenses can be included in your repayment amount. You don’t have to be using your car for business purposes to take out a novated lease with your employer.
It’s important to understand that if you change jobs, you will still be responsible for your novated lease repayments. You should also be wary of hidden costs in a novated lease. These hidden costs can outweigh any tax benefits. Make sure you get expert advice from a finance broker before you sign a novated lease agreement.
4) dealer-arranged finance.
You should avoid dealer-arranged finance. It’s usually more expensive because car dealers get a cut of any loan they help to arrange with a lender and can charge high commissions. That cost will be factored into the price of your vehicle.
Car financing requirements
Different lenders will ask for different information in the application process. But all of them will usually ask you to provide:
- proof of identity and address.
There is a points system for identity documents in Australia. Most lenders ask for 100 ID points, including at least 1 primary document.
Primary documents include a driver’s licence (60 points), a passport (50 points) and a birth certificate (50 points).
Secondary documents are usually worth 40 points. They include a Medicare card, Australian visa and Australian citizenship certificate.
Ideally, your identity documents should also show your current address. Lenders prefer you to have a stable address.
- proof of income.
This can include your most recent payslips or a statement from your employer. Lenders also prefer it if you have stable employment.
If you’re self-employed, you’ll usually need to provide your two most recent tax returns. This info should show the lender that you can afford your repayments. Lenders in Australia are legally required to lend responsibly.
- Evidence of your monthly income
This should show that you can afford your car loan repayments. Your expenses include all your essential expenses (like food, rent/home loan repayments, and utility bills). Try to reduce or cut out any non-essential expenses.
The more you can afford to repay, the more you can borrow (and vice versa). If you are employed, payslips are usually sufficient proof of income. If you earn other sources of income, the lender may require to assess your recent bank statements. Ideally, you should also be able to show a good savings history. This can also increase your borrowing power.
- a statement of your assets and liabilities.
Assets are anything you own. Owning assets gives a lender confidence to approve your loan.
Liabilities are any current debts that you have, like other loans or credit card debt. Any debts you have will reduce how much you can afford for your car loan repayments.
- details of the car you want to buy (unless you are applying for a loan pre-approval).
This info includes the make, model and purchase price of your vehicle. It also includes the rego number and the VIN (vehicle identification number). The VIN will be on the rego papers and somewhere on the body of the car as well.
If you have a deposit that you can put towards your car, you should include that info in as well. But the good news is that you don’t need a deposit to be approved for a car loan!
The car finance approval process
The first challenge is to find a lender you wish to apply with. Every application to a lender will go on your credit file so you shouldn’t go lodging applications with a large number of lenders. This is where a broker can help you, being familiar with lender interest rates and approval policies they can assess your personal situation and match you with the lender of best fit.
To apply with a lender You need to fill out an application form containing all of the above info (and possibly more) to get your car loan approved.
A car finance broker can complete and submit your application for you. They can also source lenders that will be most likely to approve it.
Your application will be assessed by the lender. They will check your credit score with one of Australia’s credit reporting agencies. These agencies keep a record of your credit history. If you have a history of paying all your debts on time, you’ll have a good credit score. This will increase your chances of getting your application approved.
If you’ve missed repayments (even if you have made them late), your credit score will be affected. Credit includes utility accounts like gas and electricity, as well as mobile phone plans. Make sure you pay those bills on time, because if you have a poor credit score, one of two things may happen:
1) your application may be declined
2) you may be charged a higher interest rate.
Lenders will also check whether you can afford your repayments, as well as checking your credit score.
If your application is approved, your lender will always require you to take out comprehensive car insurance if the loan is secured. This insurance covers damage to both your car and any others, even if the damage is caused by you. It also covers you if your vehicle is stolen, vandalised or damaged by natural disasters like a flood, fire or hail storm.
The best way to get a car loan
Here’s a 3-step process for getting a car loan.
Step 1: Check your credit score before you apply.
You can do this for free with credit reporting agencies like Equifax, Ilion and Experian.
If your credit score is less than 500, you should take steps to improve it as soon as you can! For example, by clearing up any overdue payments and making all your current repayments on time. This will improve your credit score and increase your chances of getting your car loan approved at the lowest possible interest rate.
Step 2: Talk to a car finance broker
Car finance brokers work for buyers, not for lenders or car dealers. They can help you to find the best deal. Brokers like our expert team at Auto Car Loans take the time to understand your specific situation. We will provide advice and recommend a suitable lender for you.
Step 3: Apply for a car loan pre-approval
A loan pre-approval lets you know how much you can borrow from a lender. This can save you from wasting time looking at vehicles that are outside your price range. It can also help you to negotiate with car dealers, because you know how much you can spend upfront.
Car loan pre-approvals are usually valid for up to 3 months, provided your circumstances don’t change. They can usually be extended by providing a few updated income documents.
How to get a car loan with a high debt to income ratio
This sounds very technical, but it’s a simple calculation that lenders do before deciding whether or not to approve your loan. A high debt to income ratio means that you are already spending a lot of your income on debt repayments. Your ratio will include any debt that you have, as well as your potential car loan repayments.
If your debt to income ratio is high, it will be harder for you to afford your repayments. Lenders will be more likely to decline your application. Different lenders will have different maximum ratios that they will be prepared to accept. The higher the ratio, the higher the risk.
If a lender is prepared to approve your loan with a high debt to income ratio, you’ll usually be charged a higher interest rate. This means you will pay more for your vehicle in the long run.
How is a debt to income ratio calculated?
This is best explained using an example. Let’s suppose that you and your partner have a home loan of $350,000. Let’s also assume that your combined annual income is $150,000 and that you want to borrow $30,000 for a new car. Your total debt would therefore be $380,000.
Your debt to income ratio is calculated by dividing your debt by your income. In this case, it is 2.53 ($380,000 divided by 150,000).
What is a high debt to income ratio?
The policies of different lenders vary. But most will consider any debt to income ratio of 7 or above to be high. If you’re in this position, try to reduce your debts as quickly as you can before you apply.
Can you get a car loan with no job?
Getting a car loan without a job isn’t impossible, but it is difficult. But you might be able to get approved without a job if you have:
- a family member who is prepared to be a guarantor for your loan. A guarantor is a person acceptable to the lender who agrees to become legally responsible for your repayments if you don’t make them. Having a guarantor can be an option for full-time students or those with no (or bad) credit history.
- other stable sources of income.
Other frequently asked questions (FAQs)
Still have more questions? That’s not surprising. Car loans can be confusing! Here are the answers to other FAQs that we get from our Auto Car Loans’ clients.
What is a comparison rate?
When you look at a car loan, you’ll usually see two interest rates. The higher one is the comparison rate and it includes the cost of interest plus any loan fees. You should ALWAYS use the comparison rate when comparing different loans. If the comparison rate isn’t available, compare the total repayments from one loan to another, and choose the loan with the lowest repayments.
Should you get a fixed or variable car loan interest rate?
All car loans at the moment are based on fixed interest rates. That means your monthly car loan repayment will be the same throughout the term of the loan.
Should I apply for a car loan with multiple lenders?
No, this can hurt your credit score. You should talk to a good finance broker who can recommend the right loan for your specific situation.
How can I make my car loan repayments more affordable?
One way to make your repayments more affordable is to take out your loan over a longer term. For example, taking it out over 7 years rather than 5.
Another way is to structure your finance so it includes a balloon payment. This is a larger single repayment at the end of your loan term. It allows your regular repayments to be lower.
You could also lower your expectations and buy a less expensive vehicle.
How often are the repayments on a car loan?
Car finance repayments are usually monthly. But a small number of lenders will allow you to make them weekly or fortnightly.
Can you pay off a car loan early?
Most lenders will allow you to pay off a car loan early. But make sure you check if there are any early repayment fees before you do as only a handful of lenders offer no payout penalties. You need to make sure that any early fees aren’t more than the interest you’ll save by paying your loan off early.
Can you make additional car loan repayments?
Most lenders will allow you to make extra repayments. This can help you to pay off your loan faster. But again, you should check first to see if any fees are involved. The benefit needs to outweigh the cost.
What is a low doc car loan?
A low doc car loan is for business purposes, like a Chattel Mortgage, and doesn’t require you to provide as many documents with your application. It might be suitable if you’re self-employed and can’t provide enough proof of income. But, most low doc options have minimum eligibility criteria (e.g. your ABN must be registered for GST for over 1 year, you must be a property owner, etc.)
How long can you pay off a car loan for?
Standard terms range from 1 to 7 years, though some lenders offer 10-year terms. The longer the term, the lower your repayments (and vice versa). But the longer the term, the more interest you’ll pay.
Can you get a car loan for a used vehicle?
Yes! Just about all lenders allow you to buy a used vehicle. Most lenders also allow you to purchase used cars from private sellers (e.g. through car sales). Not depending on the policy of the lender, this may attract increased interest rates.
Can you refinance a car loan?
Yes, you can refinance a car loan, but it does depend on the relevant lenders approval criteria. You may be able to refinance with the same lender, or you might have to change lenders in order to refinance. Refinancing can be a good idea if either market conditions or your personal circumstances have changed.
What can I do if I have no credit history?
If you don’t have any credit history, you might need to have a guarantor with some lenders. Others may be prepared to approve you for a secured loan without a guarantor, but chances are you’ll be paying a higher interest rate.
Can you get a car loan for a private sale?
Yes, where you purchase the vehicle is totally up to you. Some Lenders charge higher interest rates for private sales. A broker will be able to recommend a suitable lender.
How we can help
If you need a car loan for a new or used car, talk to our expert brokers at Auto Car Loans. We specialise in vehicle finance and compare our panel of 50 lenders to make sure our clients get a great deal.
Simply call 1300 301 051 to find out more. We’d love to hear from you!
DISCLAIMER : The thoughts and opinions conveyed on this website are those of the authors only and are of a general nature. This does not constitute financial or general advice to you from Auto Loans Group. You should seek your own independent advice from a professional which is specific to your circumstances before considering any of the items referred to in this article, including finance, insurance, and car buying.