There’s no denying that having a car can make life easier. It’s one of the quickest ways of getting around, whether that means getting to work or uni on time, picking up groceries, dropping the kids off at school or any one of a number of errands you might need to run through your day. You may even find that you need a vehicle for work, for example, if you’re an apprentice and need to drive your tools to and from the site.
If you need a car, but are one of the many Australians who relies on Centrelink payments and benefits (either partially or entirely) as your source of income, you may be wondering whether you can take out a loan. While it is indeed possible to do this, there are a number of factors that it is worth keeping in mind. In this article, we will consider the basics of car loans, and the things you should know if you plan to apply for one while on Centrelink. You can find out about:
What is a car loan?
A car loan is a loan taken out specifically for the purpose of buying a vehicle, such as a car or a ute or even a motorbike. If you need to purchase a vehicle but don’t have the necessary amount in savings, you may be able to finance the purchase with a loan from a bank or an individual lender. You will then make an agreement with your lender to pay the balance of the loan back, typically with interest and in monthly instalments, until it is paid off.
There are two types of car loans – secured and unsecured. A secured loan is guaranteed by an asset, typically the car itself. This means that if you do not meet your required payments on time, the lender may repossess the car and sell it. An unsecured car loan (which is an unsecured personal loan) is not secured by any property. 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, and you will likely not be able to borrow as much money.
Loans also come with fixed or variable interest rates. A variable interest rate will change continually throughout the life of the loan, based on market forces, and can provide more flexibility for the borrower. The ways in which a variable rate loan can provide flexibility include the ability to choose your repayment frequency and the term of your loan, and to make additional repayments without a fee to pay off your loan faster. A fixed interest rate is guaranteed not to change for a certain period of time, typically up to five years. At the end of this time, if you are still paying the loan off, you can choose to set it at a new agreed rate, or change it to a variable rate.
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.
Keep in mind too that 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.
Can you get a car loan on Centrelink?
Yes, it is possible to successfully apply for a car loan while on Centrelink payments and benefits. There are a number of minimum requirements that you must meet to be eligible for a car loan. For example, you must be over the age of 18, an Australian citizen or permanent resident, and earning a regular income. Many lenders will also consider your credit score, as well as the amount of money you have in savings and your living expenses, when you apply for a loan.
Regular income
One of the main eligibility requirements when applying for any loan is having a regular income, and even if your entire income comes from Centrelink payments, a lender may still deem you eligible for a car loan. Some payments, such as Austudy and Youth Allowance, will typically not be viewed as income by many lenders, as these are temporary assistance programs. Other types of payments may be seen as income by some lenders. These include:
- Veteran payments
- Age Pension payments
- Carer payments
- Family Tax Benefits
- Rent Assistance payments
- National Disability Insurance Scheme (NDIS) payments
These types of government payments are usually given to support eligible Australian residents with specific living costs, based on a range of eligibility criteria. You should ensure that you are meeting any requirements that may apply if you plan on using any government support payments to help you finance a car or repay a car loan.
Credit score
In addition to a regular income, lenders will also consider your credit score when you apply for a loan. In general terms, if you have a high credit score – likely due to not having had any major credit mishaps such as defaults or bankruptcies, and avoiding paying your bills late – 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. However, keep in mind that lenders will also consider other factors. For example, even if your credit score is low, lenders may consider your application more favourably if you have a regular income, low debts and a stable residential living situation.
Under Australia’s responsible lending laws, lenders must only give a loan if it is suitable for the borrower. This means the lender must make “reasonable inquiries” about the applicant’s requirements and objectives, and take steps to verify their financial situation.
How do you get a car loan while on Centrelink?
If you are seeking a car loan while on Centrelink benefits, you may like to consider your budget and borrowing power, find a suitable lender (perhaps with the assistance of a broker), and decide if you want to find someone willing to act as a guarantor for the loan, or even co-borrow with you.
Consider your budget and ask if a car loan is right for you
Before you take out a car loan, it may be worthwhile to sit down and make a budget that includes your income and all your expenses, such as rent, bills and groceries. Doing a budget may give you a better idea of your disposable income. If repaying a car loan will cause difficulty in other areas, then you may well consider whether it is worth taking on this added financial burden. If you do not need a car right now and can save up to buy one outright later, this may be a preferable choice for you.
Consider your borrowing power
Your borrowing power, broadly speaking, 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, your credit score and the amount that you spend each month, and lenders will typically consider this information when deciding how big of a loan you can afford to pay back without it sending you into financial hardship. Canstar’s car loan calculator could be a helpful tool for you in making preliminary calculations.
Get your documents in order
When you are making a loan application, you will typically be required to provide a lender with a range of supporting documents so they can get an idea of who you are and what your financial situation is. Among these supporting documents, you may typically be expected to provide your last two to three bank statements and payslips from your job (if you are working) and a Centrelink income statement.
Find an appropriate lender
If your sole source of income is Centrelink payments, you may find many lenders are not willing to approve your application, as they may consider the risk to be too high. You may have some success by doing an online search for banks or individual lenders who are willing to approve car loans for people on Centrelink payments. It may also be worthwhile to seek out a car loan broker. Brokers typically have information on a variety of loan products and lenders, and may be able to assist in recommending one that is suitable for your needs.
Consider if finding a guarantor or co-borrower is right for you
If you are having difficulty finding a lender who will approve your car loan application, one additional step might be to consider if someone can 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 responsible for the loan as the main borrower from the outset.
When seeking someone to act as a guarantor, such as a family member or friend, consider if they have stable finances and a high credit score. Having a guarantor, or even a co-borrower, may make your application more appealing from a lenders’ perspective. Keep in mind that if a person is considering ‘going guarantor’ or ‘co-borrowing’ with you, it may be worthwhile for them to seek professional legal and financial advice before agreeing to this decision.
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