How much can I borrow for a car loan?

A car loan is a common way to pay for a vehicle, and can be useful if you don’t have the savings to pay for a car upfront, or don’t want to spend the cash. Like other types of personal loans, car loans are repaid with interest over a set period of time.

How much can I borrow with a car loan?

The amount of money you can borrow with a car loan can vary widely. Some lenders cap car loans at around $10,000, while others may offer more than $100,000. However, the amount you can actually borrow will depend on factors such as the type of car you’re buying, your credit history, and your ability to meet the repayments.

Am I eligible for a car loan?

As with any type of loan, you’ll need to meet certain eligibility requirements before being approved for a car loan. Before you apply, it’s often worth checking to see if you’re eligible. Lenders generally require you to:

• Be at least 18 years old.
• Have a stable and sufficient income to cover the loan repayments. Some lenders may also require proof of a minimum monthly income.
• Be an Australian citizen or permanent resident, however, some lenders may accept temporary residents with specific visas.

Does the type of car loan affect how much you can borrow?

The type of car loan can influence how much a lender is willing to lend. There are two main types of car loans:

• Secured car loans, which use the car as collateral to guarantee the loan. They usually offer lower interest rates and higher borrowing limits, but if you miss repayments, the lender can repossess your car.

• Unsecured car loans, which don’t use the vehicle you’re buying as collateral. Interest rates on unsecured loans are generally higher than equivalent secured loans as there can be a greater degree of risk for the lender.

Loans can also be fixed or variable rate. While this is unlikely to affect the amount you can borrow, it can affect your monthly repayments and total interest paid over time.

The type of car you’re buying matters, too. New car loans are often secured, and lenders may allow higher borrowing amounts as the vehicle holds its value better.

How much should you borrow with a car loan?

According to a recent Canstar survey, Australians spend an average of $47,900 on new cars. There’s no hard and fast rule as to how much you should spend on a vehicle, but the accepted wisdom is often that you shouldn’t spend more than 50% (maximum) of your annual income.

If you’re wondering how much to borrow for a car loan, start by creating a budget based on your current income and expenses. Factor in repayments and running costs such as fuel, car insurance, registration, and servicing. Then work out how much you could comfortably afford to repay each month.
You can use Canstar’s car loan calculator to see what your repayments might be based on different loan amounts, interest rates and other factors.

How do lenders determine how much you can borrow?

Lenders will assess a variety of factors in your application before approving a car loan, including:

Your credit score

Your credit history is often an important factor when applying for a car loan, as it shows your reliability as a borrower.

Car and personal loan lenders also use your credit score to decide your interest rate. A higher score often means lower rates.

Your total yearly income

Having stable employment means lenders may see you as less of a risk, and a higher income may mean you’re eligible for a higher loan amount.

The amount of savings you have

Lenders often look at a borrower’s savings as a form of proof that they do have money available if something unexpected affects their ability to make repayments. Having a healthy amount of savings shows you are responsible with money and more likely to meet your repayments.

Your regular living expenses

How much you spend on things like utility bills,groceries and fuel and travel costs may also be a significant factor. Lenders will likely consider these ongoing costs, your rent or mortgage repayments, and your number of dependents (if you have any).

Other debts

If you already have high levels of debt, through other personal loans or a credit card, a lender may factor this in when deciding whether to give you a loan and for what amount.

Should you consider car loan pre-approval?

Pre-approval lets you know exactly how much you’ll be able to borrow, helping set your budget. It can also speed up the loan application process once you find the car you want to purchase, as the lender will already have the information you provided as part of the pre-approval process.

Is it better to borrow or save for your next car?

Whether it is better for you to borrow or save for your next car is a personal decision. There are pros and cons for both options.

Saving and paying upfront for your car

Pros

• Avoid paying interest on a loan.

• May give you more bargaining power when negotiating with a dealer or private seller.

• No ongoing repayments, which can help with budgeting.

Cons

• You may need to wait longer, as saving money to purchase a car requires time and discipline.

• If your savings are limited, you may have to purchase a cheaper model that doesn’t tick all your boxes.

• Using too much cash can leave you with a thin emergency buffer.

Taking out a car loan to finance your car

Pros

• You can purchase a car sooner, even if it costs more than your current savings.

• Paying your loans consistently over time can help build your credit history.

Cons

• You’ll pay interest and potentially fees, increasing the overall cost of the car.

• You may be required to take out comprehensive car insurance by your lender, which increases your ongoing costs compared to choosing a cheaper cover.

• Cars depreciate very fast, and it may happen that you end up owing more than the car is worth, especially if you sell it too soon after buying.

If you do decide to take out a car loan, consider the interest rates, fees, lending terms and repayment options available to you. Read the terms and conditions in the Product Disclosure Statement (PDS) and Target Market Determination (TMD) before making a decision.