Can pensioners get a car loan?

If you’re thinking about buying a new or used car, but are one of the many Australians who relies on a pension or similar Centrelink benefits as your source of income, you may be wondering whether you can take out a loan.

It is possible for a pensioner to apply for a car loan, though there are a number of factors to consider and risks to consider, andnot all lenders may accept car loan applications from customers on pensions.

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What is a car loan?

To buy a vehicle without paying the cash price upfront, you can take out a car loan specifically to fund this purchase. You can apply for a car loan from a bank or individual lender. Once your car loan application is approved, you will need to make regular repayments with interest until the loan balance is paid off.

Can you get a car loan on a pension?

Yes, it is possible to apply for a car loan while on a pension and be approved. There are various types of pensions available in Australia, including for age, disability and parenting, as well as for carers.

It is worth keeping in mind that under Australia’s responsible lending laws, lenders must only approve a loan if it is suitable for the borrower. Before they deem a loan suitable, the lender must make ‘reasonable inquiries’ about the applicant’s requirements and objectives, and take steps to verify their financial situation.

This means that if you are applying for a car loan while receiving a pension, your chances of approval will depend on your financial situation, whether you meet the lender’s criteria, and whether the lender feels you will be able to manage the loan repayments.

How do you qualify for a car loan on a pension?

There are a number of minimum requirements that you must meet to be eligible for any type of car loan, which will also apply if you are on a pension. While the exact eligibility criteria to successfully apply for a loan may vary, you will typically need to be an Australian citizen or permanent resident, and over the age of 18. You will also need to be receiving a regular income, and have an acceptable credit score. Your credit score will also be an important factor for consideration.

Regular income

Having a regular income is important when applying for any loan. Whether you earn part or all of your income from a pension, you may still be approved for a car loan, if you can prove you will have enough money left over after paying all your usual monthly expenses to make repayments on your loan.

Credit score

If you have a high credit score – such as if you have not experienced any defaults or bankruptcies, and you have a history of paying bills on time – then lenders will generally look at you more favourably when offering loans. If you have a low or bad credit score, this may make it harder to successfully apply for a loan, but does not necessarily disqualify you.

You can check your credit score for free with Canstar before applying for a loan, and get a better idea of how lenders see you. Your credit score can affect the interest rate you are offered on a personal loan. So, taking steps to improve your credit score may help you put yourself in a stronger position to get a better interest rate.

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What kind of car loans are available to people on a pension?

Car loans for pensioners work in much the same way as any other car loan. The key distinguishing features are whether the loan itself is secured or unsecured, and whether the interest rate is fixed or variable. Car loans are generally available through banks and financial institutions.

Secured vs unsecured loans

A secured car loan is ‘guaranteed’ by an asset that’s known as ‘collateral’; typically the car itself. This means that if you do not meet your required repayments on your loan, the lender has the right to repossess the car and sell it to recoup their costs.

An unsecured car loan, by contrast, is not secured by any property or asset. The interest rate for an unsecured car loan is likely to be higher than it would be for a secured loan, because the risk to the lender is greater. Many loan applicants are also likely to be able to borrow more money with a secured loan than an unsecured one.

Secured loans are typically used to finance the purchase of new cars up to to three years old, and used cars up to five or six years old. If a car is older than this, it may be too old to qualify for a secured loan, in which case, you may need to apply for an unsecured loan to finance the purchase.

Fixed vs variable interest rates

A fixed interest rate is one that remains the same throughout the term of the loan, typically up to five years. After the term is complete, if you are still paying the loan off (such as if you have a balloon payment), then you can choose to set it at a new agreed rate, or change it to a variable rate. A variable interest rate will change continually throughout the life of the loan, often going up or down.

A variable rate is generally seen as more flexible, as you will likely be able to choose your loan’s repayment frequency and term. You may also be able to make additional repayments to pay back your loan faster, which is not something you can do on a fixed interest rate loan.

What should you do before applying for a car loan?

If you want a car loan while on a pension, it may be worth considering your budget to decide if a loan is an appropriate choice for you, finding a suitable lender (perhaps with the assistance of a broker), and deciding if you want to find someone willing to act as a guarantor for the loan, or even co-borrow with you.

Consider your budget

Before you take out a car loan, it may be worth sitting down and making a budget that includes your income and expenses, such as rent, bills and groceries. This can give you a clear picture of your disposable income, and calculate if you can comfortably afford car loan repayments, or if saving up to buy a car down the line might be a more suitable choice. You can make a budget using a spreadsheet, or consider using the budgeting or savings app to track how you are spending money.

Get your documents in order

A lender will want to get a picture of you and your financial situation before approving a car loan. Some of the documents a lender may ask for include your last two to three bank statements and payslips from your job (if you are working), as well as a Centrelink income statement showing your pension payments. It can be a good idea to have these documents prepared ahead of time.

Find an appropriate lender

If your sole source of income is a pension, not all lenders may be willing to approve your application. It may be worthwhile doing an online search for banks and financial institutions who are willing to lend to people on a pension, or you could consider speaking with a car loan broker.

Consider a guarantor or co-borrower

If you’re concerned that a lender may not approve a car loan for a borrower on a pension, you could consider seeking out someone who could act as a guarantor for you, or become a co-borrower on your loan.

A guarantor is someone who is willing to ‘guarantee’ your loan, agreeing to take it over and pay off the balance in the event that you can not. This is different to a co-borrower, who is equally as responsible for the loan as the main borrower from the outset.

Before asking someone to act as a guarantor for your loan, consider checking if that person has stable finances and a reasonable credit score. This can help reduce a lender’s risk and help improve your car loan application’s chance of approval. A potential guarantor or co-borrower may also want to seek professional financial advice, and possibly legal advice, before committing to your loan application.

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