Having a car can undoubtedly make life easier for some people. There can be a sense of freedom and independence that comes with knowing you don’t need to rely on anyone else to get around, and can drive yourself to where you need to be, when you need to be there.
If you’re thinking about purchasing a new or used car, but are one of the many Australians who relies on Centrelink benefits such as a pension as your source of income, you may be wondering whether you can take out a loan.
While this is indeed possible, if you are a pensioner considering applying for a car loan, there are a number of key things to consider, and important things to be aware of. In this article, we will answer questions such as:
What is a car loan?
If you wish to buy a vehicle without paying the cash price upfront, you can take out a car loan specifically to fund this purchase. A car loan is typically taken out from a bank or individual lender, and after taking one out, you will be required to make regular repayments, typically with interest, until the balance of the loan 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 to be 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 your lender feels that 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, and these will also apply if you are on a pension. To successfully apply for a loan, you will need to be an Australian citizen or permanent resident, and over the age of 18. You will need to be receiving a regular income, and your credit score will also be an important factor for consideration. You can check your credit score for free with Canstar before applying for a loan.
Regular income
One of the key requirements for eligibility when it comes to applying for any loan is having a regular income. You may earn part or all of your income from a pension, but in either case, you may still be approved for a car loan. Whatever your source of income, you will need to show a lender that 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 – more likely if you have not experienced any defaults or bankruptcies, and you have a history of paying bills on time – then lenders will generally look on you more favourably in terms of offering you 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.
What kind of car loans are available to people on a pension?
Car loans for pensioners function in much the same way as any other car loan does. The key distinguishing features when it comes to loans 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 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 one, because the risk to the lender is greater. Many loan applicants are likely to be able to borrow more money with a secured loan than an unsecured one.
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, 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, given that you will likely have the ability to choose your repayment frequency and the term of your loan. 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.
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.
Your credit score can impact 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.
What should you do before applying for a car loan?
If you are seeking a car loan while on a pension, it may be worthwhile 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 worthwhile to sit down and make a budget that takes in your income and all your expenses, such as rent, bills and groceries. This may allow you to form a clear picture of your disposable income, and if you feel that car loan payments will put too much financial pressure on you, then saving up and buying 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, such as Canstar’s free budgeting app, powered by Frollo. Canstar also has a Car Loan Repayment Calculator you might find helpful.
Get your documents in order
A lender will want to get a picture of you and your financial situation before approving you for a loan, and there are a number of documents they will typically ask to see. Among these, you will likely be asked to present 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 things prepared ahead of time.
Find an appropriate lender
It is worth keeping in mind that if your sole source of income is a pension, not all lenders will 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 feel you may have difficulty finding a lender to approve your car loan application, it may be worthwhile 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. A co-borrower 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, it is worth considering whether that person has stable finances and at least a reasonable credit score. From a lender’s point of view, a guarantor like this can make your application more appealing. It is also worthwhile remembering that a potential guarantor or co-borrower may want to seek professional financial advice, as well as possibly legal advice, before committing to do this for you.
Think about consolidating your loans
If you already have loans, then one option you may consider is consolidating them into one in order to more easily manage your repayments. Debt consolidation involves combining all or some of your existing loans and debts into one place. If you wish to take out a car loan, you could then consolidate it with your other debts, potentially allowing you to make only one regular repayment and pay one set of fees. Before doing this, though, it is important to compare interest rates and fees, to make sure that you will not end up paying more than you were before.
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