Car loans for students

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’re able to borrow and how much interest you’re charged will be determined by your lender. This amount is 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 financial circumstances. It’s generally a good idea to compare car loan options before making a decision.

Lenders may have certain residential, age and income requirements that must be met before they can provide a student car loan. Most lenders require a student to be a permanent resident or citizen of Australia, however some lenders may accept temporary visa holders depending on the type of visa and time left on it. Being 18 years of age will generally be required for a student to apply for a car loan. It’s worth noting that lenders often have maximum lending amounts for borrowers aged 21 and under. For income requirements, most lenders prefer borrowers to have steady employment. Some lenders even provide car loans that casual workers are eligible to apply for. Borrowers whose sole income comes from government benefits will often not be eligible for car loans.

What are my options for a student car loan?

To find a suitable car loan while studying, you may need to shop around and do your research. 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 and 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 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 the Australian Government’s Moneysmart website warns the interest rate you’re 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. But 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. This 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.

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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. But 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.

Peer-to-peer lending

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. Loan terms can be shorter, but because it’s 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.

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. Moneysmart has a useful calculator that may help. It can also be worth shopping around and comparing several different loans from different lenders, 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 check your current credit score 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. Things that can negatively affect your credit score can include not paying bills on time, having a high credit limit on other products (credit cards and other personal loans), putting in enquiries for finance too often and frequent changes in employment and residential address.

You will also need to provide information on your income. This includes income from paid employment and other assets, as well as any government (Services Australia) payments.

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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’s important to do your research into what options are available to you. If you’re on a different type of visa, it may be worth checking directly with lenders to find out your options. Those on student visas are generally not accepted.

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 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 and the terms and conditions of your car loan, you will also need to check with your lender to find out whether a deposit is required. You may also be up for a balloon payment at the end of your loan term.

Bear in mind that on-road costs such as fees for registration (or transfer of registration), stamp duty and compulsory third party insurance (CTP) can add up. These costs vary depending on which state or territory you live in. If you’re 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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