How much can I borrow with a car loan?

Finance Writer · 19 May 2021
Thinking about a new set of wheels? A car loan can be a good option to finance the purchase of a new or used car, but there may be a limit to how much you can borrow.

If you don’t have the cash to pay for the car upfront, you may be able to borrow money and pay it off with interest over a period of time. It’s an option many Australians take advantage of, with applications for car loans increasing 3.7% per annum according to the latest Equifax Quarterly Consumer Credit Demand Index at the time of writing . However, as with other types of loans, the amount you can borrow will depend on your personal circumstances, including your credit score, earnings and expenses.

In this article we’ll cover:

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 security to guarantee the loan (if the loan is not repaid, the lender may sell the vehicle to get their money back). Some lenders may also let you take out a personal loan for a different purpose and secure it against your car.

With the other main option – an unsecured car loan – the vehicle you buy would not be used to guarantee the loan. Unsecured car loans are often simply advertised by providers as ‘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 borrower. The interest rate on a car loan can either be fixed or variable, depending on the loan.

At times, car loans can also be separated into ‘new car loans’ and ‘used car loans’. Used car loans are usually secured and may be available for applicants buying a car that’s up to 5 or 6 years old that doesn’t qualify for a new car loan.

Whatever the category, taking out a car loan comes with pros and cons (we’ll cover these below), but depending on your situation it’s an option that could enable you to get the car without needing to lay down the cash upfront.

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 or personal loans on Canstar’s database, the maximum amount varies significantly. Some limit loans to amounts of $10,000 or less, while for others the maximum loan amount is in excess of $100,000.

Compare Car Loans

The table below displays a snapshot of car loan products on Canstar’s database with links to provider’s websites, sorted by Star Rating (highest to lowest) then by comparison rate (lowest to highest). These results are based on a loan amount of $25,000, for new cars in NSW for five years. 

How much should you borrow with a car loan?

Ultimately, this is a question only you can answer, taking into account your circumstances and priorities. Australians spend an average of $40,128 on new cars, according to a Canstar Blue survey of about 2,600 new car owners. This is a significant amount of money, and the same research shows that the intended spend amount increases with income, with higher-earning households spending approximately $15,000 more on a car than lower-income earners.

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 while  considering your options.

A good starting point could be to create a budget based on your current income and expenses and then to 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 costs. Other costs can include fuel, car insurance, vehicle registration and regular servicing.

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 score is often an important factor to consider when it comes to applying for a car loan, as it summarises your reliability as a borrower. Before applying for a car loan, it may be worth checking your credit score and, if necessary, taking steps to improve it.
  • Your total yearly income: Having a stable job means lenders may see you as a safer bet, 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 people’s savings as a form of proof that they do in fact have money on hand, should anything unexpected arise. Having a good 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.
  • Your regular living expenses: How much you spend on things like utility bills (gas, electricity), food and fuel costs may also be a significant factor. As well as these costs, your rent or mortgage repayments will likely be taken into consideration by the lender, along with your number of dependents.
  • Other debt: If you already have high levels of debt, such as other personal loans or credit card or buy now pay later (BNPL) debt, a lender could factor this in when deciding whether to give you a loan and for what amount.

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 cash 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 to pay to a lender.

Using a hypothetical example, if you were to borrow $30,000 at a fixed interest rate of 6% p.a. repaid over five years with monthly repayments, you would be charged a total of $4,799 in interest, according to Canstar’s car loan calculator. There could also be upfront and ongoing loan fees to factor in.

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 pay for a car upfront  can be challenging, as for most people, saving $30,000 for a new car, for example, or even $10,000 for a used car, might require financial discipline over time.

It’s important to note that there are also potential benefits to choosing to get a car loan:

  • It may mean being able to drive away in the car sooner.
  • You could have greater flexibility, such as the choice of a more suitable but expensive car that you otherwise might not have been able to afford through your savings alone.

If you do decide to take out a car loan, consider the interest rates, fees, lending terms and your repayment options available to you. You may also like to read the terms and conditions in the product disclosure statement (PDS) before making a decision. .

Cover image source: RomanR/

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This content was reviewed by Sub Editor Jacqueline Belesky and Deputy Editor Sean Callery as part of our fact-checking process.

Katie covers all things personal finance for Canstar. Katie has worked with companies including American Express, Virgin Money and Hollard Insurance. She has contributed to publications including The Australian, The Australian Financial Review and The Financial Times.

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