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What is a car loan?
A car loan is a type of personal loan that’s taken out for the sole purpose of buying a motor vehicle, such as a car, ute or motorbike. They can help you purchase a car if you don’t have enough savings to buy one outright.
What makes a good car loan?
Not all car loans are created equal. There are many lenders and products to choose from, such as secured or unsecured loans and fixed or variable interest rate loans. You can get a car loan from major lenders, credit unions and other finance companies, and even the finance arm of major car manufacturers and sales yards.
So, before you apply for a car loan, it’s important to do your research and compare your options to find the one you think will be best-suited to your needs and circumstances.
Key things to look out for that can separate the good loans from the bad, depending on your circumstances, are:
- a low interest rate
- little to no fees (check the advertised comparison rates for a more accurate view of the total cost of the loan than the interest rate alone, and be mindful of ‘break’ fees)
- terms, features and benefits that suit you, such as the option for pre-approval, flexible repayment cycles, balloon payment and additional repayment options, and the possibility of redraw facilities
- whether the loan is secured or unsecured, though note that most car loans in Australia will be secured against the car being purchased.
If you are experiencing financial difficulty or receive Centrelink payments, you may have other borrowing options, such as the Pension Loans Scheme if you meet the eligibility requirements. If you are considering a short-term personal loan, or payday loan, keep in mind there are many risks and potentially very high costs to consider.
Tips to help you apply for a car loan
If you decide that getting a car loan is right for your circumstances, there are a few things you can do to prepare and improve your likelihood of approval.
1. Check your credit rating
Your credit rating or credit score is the number that represents how trustworthy your reputation is as a borrower. It could be a good idea to check your credit score before you apply for a loan to understand how appealing you are as a borrower, as this could affect how likely a lender is to approve your car loan application. Being rejected for a loan creates a black mark on your credit history, making it harder for you to obtain credit or loans in the future.
You can check your credit score for free with Canstar.
2. Have your paperwork ready to go
Lenders will want a good picture of your financial situation before approving you for a loan. So, get all your paperwork ready to make the process easier when you go to apply. You’ll generally need to provide:
- proof of your income, such as a payslip or tax return
- proof of your current ongoing expenses, such as your rent or bills
- copies of your current bank statements to show your savings history and any repayments you’ve made in the past, for example on credit cards
- personal identification, such as a passport or driver’s licence
3. Consider loan pre-approval
Some people like to know whether they’ll be able to get a car loan before they start hunting around and putting in offers. Getting a loan pre-approved gives you an indication of how much you can spend, along with the terms of the loan. Pre-approval is only valid for a limited time frame, usually around one to three months. Pre-approval isn’t the same thing as unconditional or formal approval, but it could help you shop with greater confidence and give you an idea of what you can afford to borrow.
Compare car loans with Canstar
If you decide that a car loan is the way to go, the most important thing you can do is research and compare the options available to you. Given the wide variety of loan products on the market and the differences between them, you want to be careful not to apply for the first loan presented to you without shopping around.
You can use Canstar’s comparison page to look for the right car loan for you.
Main image source: Jacob Lund/Shutterstock.com