Getting as much information as possible on vehicle loans and requirements will make the financing process easier which is why we’re going to look at what it takes to get approved for your first car loan in Australia.
Having a car means freedom! It’s that big day most people dream of and a major life milestone. While this is a very exciting time, it can pose some challenges too.
What is a car loan?
Although there are several alternative financing options available to fund the purchase of your first vehicle, car loans are cheaper since the interest rates are lower than these other financing alternatives.
A car loan makes it easy to budget as you will know the exact repayment you will be required to make every month. While you pay off your car while driving it, at the end of the loan term you will own the car outright.
Steps to follow before applying for your first car loan
- Set a reasonable budget. Apart from maintenance and petrol, there are many expenses involved in owning a car. All the little things add up, and you need to budget for stamp duty, registration and car insurance. This can become a burden if you do not factor this into your budget.
- Understand what a car loan is. A car loan is exactly what the name suggests. It is a secured personal loan that may be used solely to buy a used or new car. You borrow a specific amount of money that you have to repay in equal payments over an agreed term. The payment will also include interest which will be factored into your monthly repayments.
- Research car loan requirements. If you cannot meet a lender’s requirements you may be rejected, even if you can afford to buy a new car. Review the requirements so you know if you qualify for the car finance. Different lenders have different requirements and there are car loan options for people with bad credit.
- Down payment. It is very important to save up for a deposit. The bigger the deposit you have, the bigger your chances are of having your car finance application approved. A bigger deposit also means lower monthly repayments because the balance of your loan would be smaller.
- Credit score. A good credit score will offer you more options when shopping for car finance. If you have any debts against your name, try clearing them up before applying for a loan. It is always important to pay your loans and accounts on time. A lot of students do not have a credit score yet. That is probably because they have never needed any form of credit before. Having no credit history could pose some problems, but it is not nearly as bad as having a bad credit history. Although a bad or no credit score could cause some hurdles, it is certainly not impossible to obtain finance for your first car. Open a bank account and get a credit builder credit card. This is a good tip for people with no credit history. The first step into the world of credit is a bank account. When deciding whether to give you a loan, lenders will examine your bank account balance and transaction history.
- Do research. There are a vast number of car loan products. Do your research so you know you are getting the best possible deal that will suit your financial circumstances and personal needs. One of the best ways to research car loans is to compare loans on a loan comparsion website.
Once you’ve saved for your down payment and opened a bank account, it is time to look at the different types of car finance available. The kind of loan you may want to consider will depend on the kind of car you want to buy and your current financial situation.
There are two basic kinds of car loans, secured car loans, and unsecured car loans.
Secured car loans
This is the most common kind of car finance. The car you buy is used as collateral against the loan. If you cannot meet your monthly payments, the car will be taken back to recover the funds you borrowed.
Unsecured car loans
An unsecured car loan is exactly as the name suggests. The car is not used as collateral for the loan. This kind of loan poses a bigger risk to the lender and is usually only available for used cars of a lower value. Because of the higher risk, the lender is taking, interest rates can be extremely high.
Next, you have to decide on the kind of vehicle you want to purchase. A new car or a used car.
Because a new car can be resold for a higher amount, new car loans are seen as being less risky. This also means lower interest rates, but because new cars are much more expensive you will need to borrow more from the lender.
Cars that are considered too old to qualify for a new car get sold as a used car. Lender's standards in determining whether a car qualifies as a new or used car vary, but in general a car that is older than two or three years are considered as a used car.
Some vehicles may even be too old to be considered a used car. If older than five to six years, a car may be too old to qualify for a used car loan. If this is the case, you will have to consider an unsecured loan instead.
Where to get a car loan?
Many different lenders offer car loans. Dealerships offer finance, all major banks, building societies, credit unions and a myriad of online lending companies.
Compare car loans before you start shopping around for your car. This will make negotiations easier and you will know exactly what you can afford.
What you will need to apply for a car loan
- When you apply for car financing you will have to provide details of the car you intend to purchase.
- You will have so supply the lender with details regarding your income. The lender will need this to ensure your ability to make the repayments. Provide pay sheets, income tax returns, bank statements.
- Proof of identification.
- If you have any assets, provide the lender with proof of that. It could result in a more favourable interest rate.
- All liabilities. This means credit cards and any other form of debt you have, like loans or store cards.
- The lender will also require you to provide contact details of people and organizations that can verify your information. This could be your employer, previous lenders, your accountant or your landlord or property manager.
The time it will take for you to get approval for your vehicle finance will depend on various factors, such as the car you intend to buy. If you are going to buy an ordinary vehicle the process will be much quicker than if you intend to purchase a rare or used vehicle. A loan for an everyday car should be approved within 48 hours if you provide all necessary documents to your lender with the application.
Car loan interest rates & terms
Interest rates will vary, depending on the lender. There are significant differences between lenders. Interest rates typically start from 4.69% but can be up to 16.29%.
The term of a car loan also varies and can be from 1 year up to 7 years. If you can afford higher monthly repayments it is always better to opt for a shorter-term as you would save a lot of money on interest.