If this sounds familiar, a car loan is a finance option that you may want to consider. We take a look.
How do car loans work?
Car loans are an agreed amount of money you borrow to buy a vehicle and then pay back over a set period of time. Interest is charged and added to your regular repayments, and depending on the loan, you may also be charged certain fees.
The amount you are able to borrow and how much interest you’re charged will be determined by your lender, based on factors such as your current income, your ability to make the required repayments and your credit status. As a student, there are a range of loan options that may be available to you, depending on your individual financial circumstances. It’s generally a good idea to compare car loan options before making a decision on what’s best for you.
I’m a student, what are my options for a car loan?
To find a suitable car loan while studying, you may need to shop around and do your research however, as long as you can meet certain criteria, banks and credit unions, car dealers and peer-to-peer lending groups all have loans that are available to students.
Banks or credit union loans
A loan from a bank or credit union can be either secured or unsecured. For secured car loans, an asset, (typically the vehicle you’re buying), will be used as ‘security’ or collateral, to help reassure the lender that you’ll meet your regular repayments. This means that you could risk losing the car if you fail to make your repayments. On the other hand, an unsecured loan does not require any collateral, but ASIC’s MoneySmart website warns that the interest rate you are charged may be higher because the lender is taking a bigger risk.
A car loan can also be arranged with either a fixed or variable interest rate. Fixing the interest rate ensures that your regular repayments remain the same for the life of the loan. However, MoneySmart warns that you may have to pay a fee should you wish to make additional repayments or pay off the loan early. Opting for a variable rate means the interest you’re charged may fluctuate during the loan term, but it also means you could pay off the loan early or make additional repayments without any penalty fees, which could save you money in the long term.
Some banks have car loans specifically for students, alternatively, other lenders may just offer you their regular personal or car loan products. A car loan from a bank or credit union could be a good option if your savings are limited and you want to have a lump sum that you can use to shop around and buy a new or used car from either a dealer or private seller.
Car dealer finance
If you buy from a car dealer, they may agree to organise the finance for you, depending on your proof of income, residency and credit status. These loans are usually fairly quick to arrange with assistance from the dealer. In some cases, they may include an incentive, such as zero interest for the first few months of the loan. However, it’s important to confirm the total fees and charges for the life of the loan, as you may also have to pay an initial deposit, or a large lump sum (otherwise known as a balloon payment) at the end of the loan term. Dealer finance can be a good option for those who have a deposit saved and would prefer a new rather than used car.
You may decide to arrange your loan through a peer-to-peer lending platform, where you can use an online platform to seek a loan from a private lender, rather than from a traditional institution. Peer-to-peer lending is often also referred to as P2P or marketplace lending. Each platform has its own lending criteria, with some requiring applicants to earn a minimum level of income each year. Some P2P platforms may also place restrictions on how much of your income can come from government payments.
An advantage of P2P loans, according to Alan Greenstein, CEO of P2P platform Zagga, is that interest rates are often similar to or lower than those charged by more traditional lenders. Moneysmart notes that loan terms can be shorter, however, and because it is a marketplace made up of a vast range of private lenders, it can sometimes be difficult to compare like-for-like in terms of the fees and charges you’ll pay over the life of the loan.
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Preparing to apply for a student car loan
Before you apply for a car loan, it’s a good idea to work out exactly how much you can afford. The MoneySmart website has a useful calculator that may help. It can also be worth shopping around and comparing several different loans, to see if you can find the best one for you.
A lender will typically check your credit rating before approving your application, so you may want to try and have an idea of your current credit status prior to starting the process. If you already have credit in your name, such as a credit card or mobile phone contract, or have had it in the past, then this information will form part of your credit history.
You will also need to be able to demonstrate your income, and should mention how much you earn from paid employment and any Centrelink payments in your application.
Can I get a car loan as an international student in Australia?
Not all lenders will necessarily offer car loans to international students, so it can pay to do your research into what options may be open to you. However, if you are on a different type of visa, it may be worth checking directly with lenders to find out your options.
Using a guarantor to secure a student car loan
It’s not uncommon for a student to have a limited credit history, therefore a guarantor could help secure the finance you need for a car. A guarantor is generally a parent or other relative who will take on the legal and financial responsibility of the loan, should you fail to make the repayments.
This could improve your chances of getting approval for a car loan, although it’s important you take responsibility for making your repayments so that your guarantor is not left with any unwanted debt or legal obligations. If this is an option you’re considering, it’s important to discuss the idea with your proposed guarantor or guarantors beforehand, so that they understand what they’re committing to.
Other costs to consider when applying for a car loan
Apart from being on top of the interest rates, terms and conditions of your car loan, you will also need to check with your lender to find out whether a deposit is required or if you will be up for a balloon payment at the end of your loan term.
In addition, bear in mind that on-road costs such as fees for registration (or transfer of registration), stamp duty and CTP insurance can add up, with these costs varying depending on which state or territory you live in.
If you are planning to purchase a car, it may also be a good idea to consider comprehensive car insurance and the costs associated with purchasing a policy.
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