How much can I borrow for a car loan?

If you don’t have the savings to pay for a car upfront, you may be able to borrow money via a car loan and pay it off with interest over a period of time. It’s an option many Australians take advantage of, however, as with other types of loans, there are usually limits to the amount you can borrow, which will depend on your personal circumstances. This can include your credit score, earnings and expenses.

Am I eligible for a car loan?

As with any loan, eligibility requirements must be met before a lender can offer you any of its car loan products. 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.

What types of car loans are available?

Car loans typically fall into two main categories: secured and unsecured. With a secured car loan, the vehicle you purchase is used as collateral to guarantee the loan. If the loan is not repaid in time or multiple repayments are missed, the lender may repossess the vehicle and sell it to recoup the outstanding debt. Some lenders may also let you take out a personal loan for a different purpose and secure it against your car.

An unsecured car loan, on the other hand, doesn’t use the vehicle you’re buying as collateral. Unsecured car loans are often simply advertised by lenders as ‘unsecured personal loans’. Interest rates on unsecured loans are generally higher than equivalent secured loans as there can be a greater degree of risk for the lender.

The choice between a secured or unsecured car loan could impact your monthly repayments and total interest paid. For example:

• Secured car loan: A $20,000 secured loan with a 6% fixed interest rate over a five year loan term could have monthly repayments of $387, with total payable interest being $3,199.

• Unsecured car loan: A $20,000 unsecured loan with a 8% fixed interest rate over a five year loan term could have monthly repayments of $406, with total payable interest being $4,332.

This doesn’t take into account additional loan fees that may apply.

The interest on a car loan can also either be set at a fixed rate or variable rate, depending on the loan. At times, car loans can also be separated into ‘new car loans’ and ‘used car loans’, depending on the vehicle you’re purchasing. Used car loans are usually secured and may be available for applicants buying a car that’s up to 5-7 years old (this can differ between lenders) that doesn’t qualify for a new car loan. The type of car loan you decide on will ultimately depend on your personal preference and financial circumstances.

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Are there borrowing limits for car loans?

Depending on your choice of car, the type of loan and your financial circumstances, you may not be able to borrow the total value of your vehicle. Some providers set a minimum and maximum amount of money you’ll be able to borrow when applying for one of their car loans.

There is no ‘set-in-stone’ rule regarding these amounts – in fact, some have no limit to the amount you can borrow. Among the car and personal loans on Canstar’s database, the maximum amount varies significantly. Some lenders limit loans to amounts of $10,000 or less, while others have maximum loan amounts in excess of $100,000.

How much should you borrow with a car loan?

Ultimately, this is a question only you can answer, taking into account your financial circumstances and priorities. Australians spend an average of $37,326 on new cars, according to a Canstar Blue survey of more than 1,500 new car owners. The same report also recommends that you shouldn’t spend more than 50% (maximum) of your annual income on a new vehicle as a general rule.

Car loans, like other lending products, can help you achieve your personal goals if managed correctly. However, if you take out a loan that is beyond your means or with a high interest rate, it could turn out to be a costly decision for you personally, both financially and emotionally. So, while picturing yourself in your dream car might be nice, it can help to try to stay realistic when considering your vehicle options.

A good starting point could be to create a budget based on your current income and expenses and then work out how much you could comfortably afford to repay on a car loan each month. You can use Canstar’s car loan calculator to work out what your repayments might be based on different loan amounts, interest rates and other factors.

If you’re borrowing to purchase a car, don’t forget to factor in the costs of running the car, in addition to the loan repayment amount. Other costs can include fuel, car insurance, vehicle registration and regular servicing.

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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 to consider when it comes to applying for a car loan, as it summarises your reliability as a borrower. Lenders must perform a credit check as part of the responsible lending laws, to ensure that their loan products are appropriate for you and won’t put you into financial hardship.

Credit Score ranges

Car and personal loan lenders usually determine what interest rate to offer you based on the credit score range you fall in. The ranges of the three largest credit score providers (Equifax, Experian and Illion) at the time of writing are:

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Source: Equifax, Experian, Illion

Before applying for a car loan, it may be worth checking your credit score, which can be done for free with Canstar or via the Canstar app. This can help you to see what credit score range you might fall into and ultimately what interest rate you may be offered. If your score is lower than you wanted, there may be steps you can take to improve it, such as by paying off existing debts, checking your credit report for inaccuracies and by paying bills on time.

Your total yearly income

Having stable employment means lenders may see you as less of a risk to not repay the loan, and a higher income may mean you’re eligible for a higher loan amount. If your income is below a certain level, you may only be able to borrow up to a certain amount.

The amount of savings you have

Lenders often look at a borrower’s savings as a form of proof that they do in fact have money on hand, should anything unexpected arise, affecting the borrower’s ability to meet the required repayments. Having a healthy amount of savings may be viewed by lenders as evidence that you are responsible with money and will also be more likely to meet your repayments. This may also include any other assets you own, like property, other vehicles or investments.

Your regular living expenses

How much you spend on things like utility bills (gas, electricity and internet), groceries and fuel and travel costs may also be a significant factor. As well as these ongoing costs, your rent or mortgage repayments will likely be taken into consideration by the lender, along with 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 could factor this in when deciding whether to give you a loan and for what amount.

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Should you consider car loan pre-approval?

Getting pre-approval for a car loan could help when shopping around for the car itself, as you’ll know exactly how much you’ll be able to borrow and can set your budget and expectations accordingly. You may also have negotiating power with sellers, as pre-approval shows that your finances are in order, and may mean that a lender is more willing to approve your application, and potentially even offer you more favourable terms, such as a lower interest rate. Pre-approval may 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.

What features do car loans offer?

Car loans can come with various features that could make repayments more manageable or allow you to pay back the loan faster, which would mean paying less interest. Some features to consider are:

• Early repayment options: Some lenders may let you repay your loan earlier than the agreed term, without incurring financial penalties. This could allow you to save on interest payments, as generally the longer you take to pay a loan back, the more interest you’ll pay the lender.

• Redraw facilities: These facilities allow you to access the additional repayments you have made. This can be useful if unexpected bills arise and you need additional funds quickly. There’s often minimum and maximum withdrawal amounts, as well as potential associated fees. It’s worth checking with your lender to see how their redraw facilities function.

• Balloon payments: A balloon payment refers to a large lump sum payment that is due at the end of the loan term. By taking a loan with a balloon payment, your monthly repayments may be smaller as a result. That being said, you would need to ensure that you had sufficient funds to pay the balloon payment at the end of the loan term.

It’s usually worth asking your lender about the features that they include in their loans and if they come with any extra fees.

What fees do car loans have?

Some of the common fees that are associated with car loans are:

• Establishment fees: Some lenders may charge a one-time establishment fee when setting up your loan.

• Ongoing fees: These fees can be charged monthly or annually and are usually paid for the associated administration costs of maintaining your loan.

• Early exit fees: Some lenders may charge you for paying off your loan early. This is due to the lender missing out on an amount of interest that was agreed on as part of the loan’s term length.

• Late payment penalties: A common loan fee, in which you may be charged extra if you miss a repayment.

It’s worth checking the breakdown of a loan’s fees, which can be found in the Product Disclosure Statement (PDS), before you agree to sign.

How can you get a better deal on a car loan?

Here are five things you could consider doing to help you get a better deal when applying for a car loan:

1. Boost your deposit: Having a higher deposit when applying can reduce your overall loan amount and the interest you would have to pay.
2. Shop around and compare different lenders: Signing up for a car loan without doing any research or comparing loans could mean missing out on a good deal. By shopping around and comparing different lenders and loan products, you can often find better rates and lower fees, as well as lenders and loans that better suit your needs. You can compare different car loans with Canstar.
3. Improve your credit score: Lenders often look more favourably on borrowers with higher credit scores and may offer them lower interest rates as a result. You can improve your credit score by paying bills on time, paying off additional debts and lowering credit limits on other financial products such as credit cards etc.
4. Choose a shorter loan term: This means you’ll pay less interest overall, but keep in mind that your monthly repayments will often be higher as a result.
5. Buy a qualifying vehicle: Some lenders may offer better interest rates for newer or environmentally-friendly cars, such as hybrid and electric vehicles, through loans often referred to as ‘green car loans’.

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 will be a personal decision. There are pros and cons for both options.

You may not have to borrow anything at all if you have the savings to pay for your car upfront, as well as to cover on-road costs. This will mean that you do not have to repay interest on a loan, saving the additional money you might otherwise have paid to a lender.

Using a hypothetical example, if you were to borrow $35,000 at a fixed interest rate of 6.5% p.a. repaid over five years with monthly repayments, you would be charged a total of $7,361 in interest, according to Canstar’s car loan calculator. There could be upfront and ongoing loan fees to factor in as well.

Being able to pay ‘in cash’ or upfront may also help you to negotiate a better deal on the price of a new or used car. This might be the case particularly if you are wanting to negotiate on a used car with a private seller.

However, saving up to buy a car outright can be challenging, as for most people, saving $35,000 for a new car, for example, or even $15,000 for a used car, might require financial discipline over an extended period of time.

It’s important to note that there are also potential benefits to choosing a car loan, such as being able to buy the car sooner than if you were saving up for one and the potential flexibility, like being able to choose a more suitable but expensive vehicle that you otherwise might not have been able to afford with your savings alone.

If you don’t wish to immediately buy the car, you may be interested in car leasing instead. This can be a good option if you want to upgrade your car regularly or test the vehicle out over a longer period of time. There are also novated leases, which allow you to salary-sacrifice a portion of your before-tax income to cover the costs of leasing. At the end of the leasing period, you may be able to buy the car by paying off the remaining balloon payment.

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

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