How to Get a Car Loan (2024)

If you’re looking for a car loan in Australia, you aren’t alone. According to the Australian Bureau of Statistics (ABS) lending indicators for December 2023, the value of new fixed-term loan commitments for the purpose of purchasing a road vehicle was well over $15 billion across 2023, averaging out to approximately $1.3 billion per month.

Before you dive head-first into your application, it’s important to understand more about the process, how it works and how you can best prepare yourself for success and a competitive loan deal. Find out how you can get your car loan application off on the right foot with Savvy today!

What is a car loan?

A car loan is a financial arrangement where a lender provides funds to a person to purchase a vehicle. The borrower agrees to repay the loan amount, plus interest and relevant fees, over a specified period (often between one and five years, but terms can reach up to seven).

This allows individuals to spread the cost out over time, rather than paying for it all at once, which can make the payments more manageable and put less immediate strain on your finances. Typically, the car itself serves as collateral for the loan. However, you may be able to purchase one with an unsecured loan.

Meeting the eligibility and document requirements

Before you begin your application, it’s important to understand what your lender’s eligibility requirements are. These can vary between companies, but the following are common when it comes to car loans:

• Age: you must be at least 18 years of age to apply for a car loan
• Residential status: in most cases, you must be an Australian citizen or permanent resident
• Income: you must meet your lender’s minimum income requirements, which can start from as little as $20,000 to $26,000 per year and can include certain fixed Centrelink payments, such as age pensions, veteran payments and single parent payments
• Employment: lenders will also usually require applicants to be employed and earning a consistent income from their job

You’ll also need to supply a series of documents as part of your application, so it’s worth preparing these in advance. While requirements can also vary, these may include:

• Personal information: such as your name, date of birth, contact details
• Proof of identity: your driver’s licence and another form of identification, such as your passport, Medicare card or birth certificate
• Proof of income: this may be your last two payslips and 90 days of bank statements, but if you’re self-employed you may be able to supply your last one to two years of tax returns instead of payslips
• Assets and liabilities: you may need to supply information about any assets you own, such as your home, other vehicles and cash savings, as well as liabilities like outstanding debts
• Car information: you’ll need to supply details about the car you wish to buy if you already have it picked out, such as the make, model, year, chassis or vehicle identification number (VIN) and registration number.

Getting your car loan pre-approved

Car loan pre-approvals are a great way to test the waters before lodging a car loan application, as it gives you an idea of how much you may be able to spend on a car. A pre-approval gives you a better insight into your possible price range even before heading to the car dealer or clicking on a button online. According to Bill Tsouvalas, Managing Director of Savvy:

Pre-approval follows the same general application process but doesn’t require a hard credit check (which leaves a mark on your credit file). This allows you to get pre-approved through several lenders based on your profile and compare which offer is best suited to your needs in terms of borrowing range, interest and fees and more.

Getting pre-approved doesn’t necessarily mean you have an obligation to the lender to borrow that amount. It usually lasts for up to three months, giving you time to decide if you should push through with a car loan application. Having a record of pre-approval can give you a stronger hand when it comes to negotiating the price of your car with a dealer or private seller, as they’ll know what your upper price limit looks like.

If you’re curious and want to know how much you could ask to borrow, you can get pre-approval for free through Savvy with no obligations.

Organising car finance

There are several options to choose from when getting your car financed.

Banks, credit unions or building societies

The common route people take is going to their bank simply because it seems easier that way. Car loans from banks are mostly secured loans. This means they use the car you want to buy as collateral for the loan, which offer lower interest rates than unsecured loans as a rule.

However, banks tend to have stricter criteria than other lenders. Most banks won’t offer loans at all to applicants with a bad credit history, while they may enforce lower age caps on the cars they can finance. This also means that in some cases of buying a very old used vehicle, you may not be eligible for a loan.

Specialist or online lenders

Unlike banks, specialist car finance companies or online lenders may have more relaxed criteria when it comes to both the profile of applicants and the age and condition of their car. Some online lenders specialise in lending to customers with bad credit, which can open doors for many individuals. These will come at a higher rate and potentially greater fees, though.

It’s important to note that going with a non-bank lender means you’ll need to do your research to determine which is the best option for your needs. However, by applying through an in-person broker or using online comparison tools, you can have the work done for you (though you may be charged fees for a broker’s service).

Dealer finance and 0% p.a. loans

It may be tempting to apply for dealer finance, especially if they advertise 0% p.a. loans. However, it’s important to understand how these deals work before you sign on the dotted line.

While your dealer will handle all the paperwork, you’ll likely have to pay a commission to your sales representative as part of your deal. Loan terms can also be shorter, such as being capped at three to five years. Additionally, some, or all, of the following may apply to a 0% p.a. finance deal you’re considering:

• The purchase price of your vehicle may be increased to compensate for the lack of interest
• Higher fees may be charged
• Your interest-free period may not last the entire term, in some cases ending after six to 12 months
• Your dealer may be less willing to negotiate on the cost of your car
• You may receive a lower valuation for your current car if you’re trading it in to buy your new one
• A significant residual or balloon payment may be attached to your loan, lowering your repayments month-to-month but requiring you to pay a large lump sum at the end of the term

Lenders vs brokers

In the car loan market, you will come across two kinds of financial service providers: lenders and brokers. Lenders are sources of capital, authorised to enter into a credit agreement with you (offer you a loan) directly. They’re typically made up of banks, credit unions car manufacturer financial services and standalone finance companies.

On the other hand, brokers are intermediaries that have access to multiple lenders and financial institutions on a partnered panel who find a car loan deal on your behalf. Brokers can prepare applications for you and seek out and negotiate deals directly with lenders to potentially secure deals you may not have otherwise had access to.

What to consider when comparing car loans

When comparing car loans, consider several key factors to ensure you choose the most suitable option for your needs:

1. Eligibility: before all else, it’s essential to make sure you’re eligible for the loan you’re considering. This will save you a swift loan rejection if you don’t meet their requirements.
2. Interest rates: compare the interest rates offered by different lenders. A lower interest rate means lower overall costs over the life of the loan.
3. Fees and charges: consider any fees, such as establishment or ongoing charges as well as conditional costs like early and late payment fees. These can significantly affect the total cost of borrowing.
4. Comparison rate: a comparison rate is a tool used to help borrowers understand the true cost of a loan by taking into account not just the interest rate, but also any additional fees associated with the loan. This won’t include conditional fees, however.
5. Loan term: consider the available loan term lengths, as not all lenders may offer the minimum of one year or the maximum of seven. A longer loan term may result in lower monthly repayments but will also mean paying more in interest over the life of the loan.
6. Repayment options: check whether the loan offers flexible repayment options such as weekly, fortnightly or monthly repayments, and whether you can make additional repayments without penalty.
7. Total cost of ownership: don't just focus on the loan itself; consider the total cost of owning the car, including insurance, maintenance, fuel and depreciation.

Secured vs unsecured car loans

Secured car loans use the vehicle itself as collateral for the loan. This means that if the borrower fails to repay the loan according to the agreed terms, the lender has the right to repossess the vehicle to recover the outstanding debt.

Because of this security, secured car loans typically come with lower interest rates compared to unsecured loans. However, borrowers should be aware that if they default on the loan, they could lose their vehicle.

In contrast, an unsecured car loan doesn’t require any collateral. Since there is no security involved, unsecured car loans tend to have higher interest rates and fees, which helps mitigate the risk involved in approving large sums of money.

This risk also means that there may be loan caps put in place, compared to secured loans which often don’t cap their loan amount and can approve you up to an amount they feel you can comfortably afford to repay. Additionally, borrowers with less-than-perfect credit histories may find it harder to qualify.

Working out how much you can borrow for your car loan

Several factors can influence the amount you can borrow with a car loan:

1. Income: lenders assess your income to determine your ability to repay the loan. A higher income may allow you to borrow more.
2. Expenses: your existing financial obligations, such as rent or mortgage payments, utilities and other loans, can impact how much you can borrow. Lenders consider your regular and ongoing expenses when assessing your loan application.
3. Credit history: your credit history and score play a significant role in determining your eligibility for a car loan and the amount you can borrow. A higher credit score may qualify you for a larger loan amount and lower interest rates.
4. Loan term: the length of the loan term can affect the amount you can borrow. If you have less available income, opting for a longer loan term with lower monthly repayments may improve your chances of approval.
5. Value of the vehicle: lenders will tailor the loan amount to fit the value of the car you intend to purchase. This means you typically won’t be able to borrow more than your car’s value, but in some cases, you can include on-road costs like stamp duty and rego.
6. Deposit: while making a larger deposit may not strictly impact the amount you’re eligible to borrow, it can help you qualify for finance on more expensive vehicles.
7. Employment and residential history: stability in your life can positively influence your loan application. Lenders prefer borrowers with a steady employment and residential history, as it indicates a reliable source of income for loan repayments.

Determining how much you can borrow for a car loan is a practical and financially responsible step. It gives you a clear understanding of the price range of cars you can realistically afford, ensuring that you don't overextend yourself financially and allowing you to focus your search on cars that fall within your budget.

Understanding car loan costs

Before committing to any loan agreement, it’s important to understand how car loan costs work in practice and to calculate them accurately. This involves factoring in all associated costs, including interest rates and loan term. The following table showing repayments on a $30,000 vehicle gives you an idea of how they can be affected by various factors (to keep it simple, fees have not been included in the calculations):

Of course, these are just example scenarios.To obtain a more accurate indication of what your car loan might cost, you can use a car loan calculator to work out how much loans of different sizes, lengths and interest rates would set you back overall.

What to do if you have a bad credit history

You may be unsure about getting a car loan if you feel your credit history isn't where you want it to be. If so, you aren't alone. In fact, according to Equifax's 2022 Australian Credit Scorecard, both 18 to 24-year-old (665) and 25 to 39-year-old (796) age groups have lower average Equifax scores than the national average of 846. For reference, Equifax considers scores in the range of 460 to 660 to be average and 0 to 459 to be below average.

If you happen to have a score which sits in the average to poor range with your credit reporting agency, you might be doubtful if you can have a car loan approved. Fortunately, there are many lenders who specialise in working with individuals with low credit rating.

It's worth noting that a not-so-perfect credit rating will likely lead to higher interest rates and fees, as well as potentially restricting the amount you're able to borrow with your lender, so you'll need to budget for more costs month-to-month if you're in this position.

Working towards improving your credit score will help boost your chances of securing a better rate and opening up more options to choose from in the future. Doing things as simple as lowering your credit limit, getting rid of any unnecessary cards and continuing to make payments on time and in full can all help your score grow.

Buying a car for your business

Many businesses require vehicles as part of their day-to-day or ongoing operation. This demand continues to rise as, according to Equifax, commercial asset finance applications in Australia across Q4 2023 (October, November and December) were 8.9% higher than over the same period the year prior. This number also includes assets such as equipment, though.

If you’re looking to purchase a car for your business, you’ll have different options to choose from than standard consumer car loans. A chattel mortgage, for instance, works in the same way as a car loan but comes with several key tax benefits, such as GST, interest and depreciation all being claimable. There are also other options which may be available to you, such as the following:

• Hire purchase agreements: under a hire purchase arrangement, a lender purchases the vehicle on behalf of your business and effectively rents it out to you for the duration of your repayment term. Once the final payment is made, ownership is transferred to your business.
• Finance leases: a finance lease involves the purchase of a vehicle by a provider, who subsequently leases it out to your business for use over a fixed period (usually up to five years). In many cases, a balloon payment is attached to the end of the lease, which can be paid by the business to formally purchase the vehicle.
• Operating leases: in contrast, an operating lease enables businesses to use a vehicle for a set period and hand it back to the lessor at the conclusion of the term. Costs relating to the car’s maintenance are included in the lease payments, which isn’t the case for finance leases.

How to budget for your car loan

It’s important to budget carefully for car-related costs, as well as those related to your loan. There’s a list of expenses to keep in mind when buying your next vehicle, including:

• Car registration
• Stamp duty on the purchase (cost will depend on where you live)
• Car loan repayments
• Comprehensive car insurance (mandatory under all car loan agreements)
• Servicing and maintenance costs
• Petrol expenses

Owning a car can significantly increase your annual costs. According to the Australian Automobile Association’s Transport Affordability Index, in Q1 of 2024, Australian households spent 16.9% of their income on transport costs. You must be sure when buying a vehicle that you can pay for not only the car itself but also its running costs. Here’s an example of how it can add up: