How to apply for a car loan

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?

It’s worth noting that not all car loans are the same. There are many different lenders and loan products to choose from, such as secured (where the vehicle or other asset is used as a security for the loan) or unsecured car loans, as well as the interest rates that apply to them, like a fixed rate (stays the same over the life of the loan) or variable rate (can change due to economic conditions). You can get a car loan from major lenders, credit unions and other financial institutions, and even through the finance arm of major car manufacturers and sales yards.

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.

Some key things to look out for that can separate suitable car loans from unsuitable ones, 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 rather 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. It’s important to note that most secured car loans in Australia will be secured against the car being purchased.

Compare New Car Loans

If you are experiencing financial difficulty or receive Centrelink payments, you may have other borrowing options, such as a No Interest Loan (NILs) 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 higher fees to consider.

Tips to help you get 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 begin the car loan application process to better understand how appealing you are as a borrower, as this could affect how likely a lender is to approve your application.

Being rejected for a loan is noted on your credit history, making it harder for you to obtain credit or loans in the future. This is why it’s advised to not make frequent loan applications, unless you’re confident that you’ll be accepted. If your credit score isn’t as high as you’d like it to be, there are several ways to help improve your score, such as by paying off existing debts (if you have the ability to), paying your bills on time, checking your credit history for inaccuracies and considering lowering credit limits on financial products like credit cards.

You can check your credit score for free with Canstar or via the Canstar App.

2. Set up your budget

To get a broader sense of your overall budget, Canstar’s budget planner calculator may be helpful. It covers budgeting factors like your income, living expenses, insurance and superannuation, loans and credit cards, transport and leisure, and entertainment. It may be worth also factoring in the potential ongoing costs for your new car such as fuel, car insurance and servicing and maintenance costs.

You could also use Canstar’s car loan repayment calculator to get a better idea of what your potential repayments might look like. It’s important to note that if you opt for a variable rate car loan, your repayment amount might change over time and may be worth budgeting for.

Consider how much you’ll be able to borrow — also referred to as your borrowing power. This describes the highest amount a lender is prepared to approve you for when you apply for a loan. Your borrowing power is generally determined by your income, expenses and credit score. The number of dependents you have, like children, may also impact your borrowing power.

3.  Have your paperwork ready to go

Lenders will want a good picture of your financial situation before approving you for a loan. This is due to Australia’s responsible lending laws, which instruct lenders to make reasonable inquiries into potential borrower’s financial situations to ensure a loan product is suitable for them. Getting all of your paperwork ready can make the process easier (and potentially faster) when you go to apply. Bear in mind that lenders generally require you to be aged over 18, be an Australian citizen or permanent resident and earn some form of income.

When it comes to the loan application process itself, you’ll generally need to provide:

• Proof of your income, such as payslips or your most recent tax return.

• Proof of your current ongoing expenses, such as your rent, bills etc.

• 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 photo identification, such as a passport or driver’s licence.

Your income may come from a variety of different sources, such as employment, government benefits and investments. While some lenders may not recognise Centrelink payments as income, there may still be options for those receiving government benefits, but it will ultimately depend on personal circumstances. Regular fixed Centrelink payments such as the age pension, veterans payments, family tax benefits and National Disability Insurance Scheme (NDIS) payments are more likely to be seen as income by lenders.

The lender may also request information on the car you intend to buy. This can include:

• A contract of sale or dealer invoice that contains their address, contact numbers and ABN.

• The year, make and model of the car.

• The vehicle chassis number or vehicle identification number (VIN).

• Information relating to the vehicle’s registration.

• If the car is fuel efficient like a hybrid or electric vehicle, as some lenders offer green car loans for eligible vehicles, sometimes with more features and at lower interest rates.

Some lenders may also require you to take out comprehensive car insurance for your new vehicle. This is so your loan can be repaid in the unfortunate event that your car is written off.

4.  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 pre-approval

Compare car loans with Canstar

If you decide that a car loan is the way to go, one of the most important things 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, it’s often worth shopping around first, rather than applying for the first loan presented to you. You can use Canstar’s car loan comparison table to help look for a car loan that’s suitable for your needs.

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