When it’s time to buy a new car, it’s best to know exactly what lenders will be looking for when they assess your loan application. Learn about eligibility criteria, your chances of getting approved, the importance of your credit score, and the difference between secured and unsecured loans. Then, you’ll be in the driver’s seat to get the best loan deal for the car you want.
Am I eligible for a car loan?
To be eligible for a car loan, you must:
- Be aged 18 years or older
- Be a citizen or permanent resident of Australia
- Have an income.
Being eligible does not guarantee approval. Each lender has their own set of specific requirements for vehicle finance. Keep reading to check your chances of being approved.
How will lenders decide?
Lenders are legally obliged to act responsibly. They must consider your ability to repay the loan based on your financial situation. They must not approve a loan that would destabilise your finances.
Lenders work out your borrowing power by looking at your income, debts and expenses, and credit history. You can get an idea of your borrowing power by using an online loan calculator to see what your repayments will be.
Your Income
Your income might include:
- Salary or wages.
- Business income.
- Income from gig work, such as driving for Uber.
- Rental income.
- Interest.
- Dividends.
- Welfare, pensions or income from superannuation.
- Any other payments, entitlements or distributions.
But be aware that each lender views income differently.
For example, if your income is from casual work or gig work, you’ll probably need to prove that your income is predictable and stable. Some lenders may not offer loans to people who are not working.
Debts and expenses
You need to have money left over from your income after you meet:
- your total debts — include your credit card limits when you work this out
- your total expenses — your rent, grocery bill, electricity bill and so on — everything you spend money on.
Lenders want to be sure you can afford your repayments after you have met all your other expenses.
Be honest with yourself about this. You want your new car to be a source of enjoyment, not anxiety.
Your Credit history
If you’ve ever applied for a loan or a credit card, there will be a credit report on you. It details:
- All your credit applications, what was approved and what was rejected
- Any late or missed loan, card or bill repayments.
Your overall credit rating is summarised in a number called a credit score (see below).
What credit score do I need?
Lenders look at your credit score to help decide whether to give you a loan.
You should check out your credit score before you apply. You can get your credit report for free from a credit ratings agency: Equifax, Experian or Illion.
The higher your credit score, the more favourably a lender will view you. For a car loan, lenders like to see credit scores above 620 (on a scale from 0 to 1000–1200). This means you are more likely to be approved and to get a lower interest rate.
The lower your credit score, the more likely the lender will see you as a risk, the more hesitant they will be to approve your application, and the higher the interest you’ll have to pay. There are some hints to improve your credit score here.
Even if your credit score isn’t so good, a lender can still approve a car loan for you. But it might be a bit less than you really want and you might have to provide security.
Will I need to provide security?
Loans can be secured or unsecured.
- A secured loan is included on a government register (the PPSR). It gives the lender the right to take (repossess) and sell the car if you fail to make the repayments.
- An unsecured loan is usually only given to borrowers with high credit scores. With an unsecured loan, the lender cannot simply take the asset to recover their money. They can, of course, still pursue you for the money if you fail to make repayments.
It is easier to get a secured loan than an unsecured loan. The lower your credit score, the more likely the lender will require that the car be offered as collateral.
If you need a secured loan, it might restrict the sort of car you can buy, as lenders want to make sure it is something they can sell easily.
Why isn’t my car loan on my credit report?
Your car loan will become part of your credit report. If you get a credit report and can’t see the loan, it probably hasn’t been reported to the reporting agencies yet. Wait a few months and get another report. If it’s still missing, talk to your lender. It’s possible that an error has occurred.
You might wonder whether it matters. It does.
Just meeting the repayments on a car loan can improve your credit score. This can make it easier to get credit or a loan in future. This might be particularly important if you want to borrow to buy a home one day.
Will I get approved for a car loan?
If you’ve met the eligibility requirements, have a good credit score, and can afford the repayments based on your income, debts and expenses, then you have a good chance of your loan being approved.
If you’re having trouble figuring out your borrowing power or which lenders to approach, a broker can help. They will be familiar with the requirements of a range of lenders.
Remember that you want to get the best car loan deal — the lower the interest rate and fees, the more money you will save. The best time to arrange finance is before you go shopping. That way, you know what you can spend. And when you find the right car, you are ready to go! Again, a broker can be helpful here.
