A car is often one of the largest purchases someone will make in their lifetime. The upfront cost can be tens of thousands of dollars is unattainable for most in terms of cash savings.
By taking out a car loan you can access the car of your dreams and spread out the cost over a number of years.
But if you are new to the world of car finance then you may hear terms you don’t know and calculations that don’t make sense to you (yet!).
In this article, we’ll share all the basics so you can get up to speed with how car loans work, before applying for finance; how to apply, who is eligible, what gives you the best chance of a positive outcome, and who can help you achieve it.
In This Post:
What Is a Car Loan?
A car loan is a type of finance where a lender gives you money to buy a vehicle, and you agree to pay it back over time with interest.
Most car loans are “secured”, which means that the asset is used as collateral for the loan.
If you do not repay the amount the car will be taken from you (repossessed) and sold so the lender can recover some of the funds owed.
In return, you get a lower interest rate and lower repayments.
Car loans exist so that people can spread out the high cost of purchasing a vehicle over multiple years.
It can be easier to pay $200 a week to buy a brand-new car than it is to save $50,000 in cash!
Lenders who offer car loans are for-profit organisations so this convenience comes at a cost. We will look at this in more detail later in the article.
What Lenders Offer Car Loans?
The lenders who offer car loans are always changing. Many years ago (pre-Royal Commission) the big four banks had large car loan books, but they have since limited access to these products.
This created space for other lenders to take market share, which also allowed smaller non-bank lenders to enter the bottom end of the market and offer loans to pensioners and those with poor credit.
It is a landscape that ebbs and flows, which is why it is important to work with a car loan broker who understands the market.
Click the button below to get in touch with our team of auto finance experts today!
Banks and Credit Unions
The traditional way to get a car loan is to go to your existing bank and make an application. Simple!
There is only one problem with this in today’s world – banks don’t like car loans very much.
Repossessions can generate bad press and banks are as much about their public image (and avoiding the wrath of politicians) as they are about serving genuine market needs.
So the product options are narrow and eligibility criteria are strict. The interest rates can be pretty good though, if you qualify.
Non-Bank Lenders
With banks gradually moving away from car loans there was an opportunity for other lenders to fill that gap in the market.
There is now a long list of non-bank lenders who specialise in servicing all corners of the market.
If you plan to apply directly to a non-bank lender then it is on you to do the legwork and shop around to find the best deal for you.
You may be comparing interest rates and fees between lenders, but this is only part of the equation.
Just as important is eligibility for their loan products. You can find the best car loan on the market, but if the vehicle you want doesn’t meet their criteria, or your credit score is not within their thresholds then you may not be approved.
Leaving you to try again at the next lender.
Here at Gusto Finance, we deal with most of them on a daily basis!
Manufacturer Finance
If you are buying a brand new car then you may be able to access exceptional rates directly from the financing arm of the manufacturer.
In the past, these have been offered for as low as 1.99%! While that is rare these days, the idea is that they may sacrifice profit on the finance to sell the car.
Today you can still get a good deal but the rates have become far more normal.
The Role of a Car Loan Broker
Car loan brokers act as middlemen between borrowers and lenders, helping you find the best deal based on your financial profile.
Being able to place your loan application with 40+ lenders is the most obvious benefit of partnering with a broker.
It is just as important to place your application with the lender who is most likely to approve your application AND the most competitive interest rate.
There is no point in applying for the cheapest loan only to be rejected.
In fact, a declined car loan application can hurt your credit score and will be scrutinised by future lenders.
Getting it right the first time is one of the biggest benefits of using a broker. So get in touch today!
Types of Car Loans
Secured Car Loan
A secured car loan is the category of loan that we discussed at the top of the article where the vehicle you’re purchasing is registered as collateral.
This means that if you can’t repay the loan the lender has the legal right to repossess the car to recover their money.
Sounds serious, right? But, this additional safety net for the lender allows them to offer lower interest rates when compared to unsecured loans.
The additional security lowers the risk of the loan for the lender.
Unsecured Car Loan
An unsecured loan has no collateral attached and functions just as a regular personal loan – except you must buy a car with the funds.
So if you do not repay your loan the lender cannot take possession of the vehicle quite as easily.
It is still possible but will require an expensive legal process (which you will end up paying for).
While it may sound better on the surface to keep your car distanced from the loan you used to buy it. However, the trade-off is the loan will have a higher interest rate and approval may be more difficult.
The risk is higher for the lender which means higher costs and stricter requirements.
Personal Loan
A personal loan operates in the same way as an unsecured car loan, except you have no obligation to purchase a car with the funds.
This is generally a more expensive option. A lender has no certainty that you will have an asset in your name that holds value as a result of funding the loan.
So even the expensive legal avenues of recovery may not be available to the lender if you default on the loan.
The interest rate may be higher to compensate for this additional risk.
Commercial Car Loan
A commercial car loan is very similar in form and function to a regular secured car loan, except the car is used for business purposes and the loan may have a different name.
A chattel mortgage is the term used for a secured commercial car loan.
It operates the same way in that the car is held as security against the loan and can be repossessed in case of non-payment.
How to Get Approved for Car Finance
To be approved for car finance you need to tick all the boxes in a lender’s credit assessment criteria, and be able to demonstrate that you can repay the loan without any financial struggle.
Below we will briefly cover all of the main elements of a credit assessment. However, every lender varies in what elements they consider and the thresholds they require.
For additional guidance on your individual situation submit an inquiry below and our brokers will be in touch.
Credit Score
Your credit score provides a quick snapshot of your history of managing debt and is a predictor of the likelihood of a future default event (not repaying your loans).
A higher score signals reliability, making lenders more inclined to approve your loan on favorable terms.
While a lower credit score will exclude you from some lenders, others will lend to very low credit scores if there are other factors that indicate you are a good credit risk – despite past troubles.
One of the most damaging things you can do to your credit score in the short term is apply for a series of loans in quick succession.
Especially if the applications have been for high-interest cash loans. You’ll hear terms like Small Amount Credit Contract (SACC), Medium Amount Credit Contract (MACC), or payday loans thrown around.
These are all generally detractors to your credit score and will limit what car loan options are available to you.
Employment Type
The type of employment can be just as important as the income you earn.
A long-term, full-time employee presents as much more stable than a casual employee whose hours and income may fluctuate week to week.
Tenure in your role will also be scrutinised as part of your loan application.
If you have recently changed jobs then you may be ineligible to apply with some lenders, whereas other may have no or very low tenure requirements.
Stability of Income
A steady income reassures lenders of your repayment capacity and determines your borrowing power.
Longer tenure with your employer and uninterrupted income over time is looked upon favourably by lenders.
They typically require proof of sufficient earnings to cover loan installments alongside other living expenses.
Centrelink Income
If you are receiving some form of Centrelink income then you can still apply for a car loan.
Suitable categories of government benefits can include:
- Family tax benefits
- Parenting payments
- Aged pension
- Carers payment
- Disability support payment
Bank Statement Activity
Your spending habits give the lender important information on how well you are managing your finances.
Income, loan repayments, living expenses, and any discretionary spending you do will also be looked at closely as part of your application.
Being able to afford your repayments is one thing, but you also need to avoid the following red flags that may deem you ineligible even if everything else looks good.
- Rapid depletion of funds on payday
- Payment reversals
- Use of Wage Advance products
- Excessive Buy Now Pay Later use
Savings and Paying a Deposit
A car loan deposit is an upfront payment made toward the cost of your new car before financing the rest with a loan.
This reduces the amount you are required to borrow to fund the purchase of the vehicle.
Resulting in lower risk for the lender and less debt exposure for you on an asset that is going to depreciate.
It also demonstrates to the lender that you have surplus income that could be put towards repaying your car loan, and that you have the financial discipline not to spend it!
Car Loan Structure (Repayments and Fees)
Interest Rate
Your interest rate is (usually) the most influential item in the cost of your car loan.
The rate attached to a loan is usually a function of the risk associated with that loan.
If you have a high credit score, a stable job, and do not demonstrate any of the negative factors discussed above then you are likely to be eligible for a low interest rate.
If you have a lower credit score and have defaulted on loans in the past, you may still be eligible for a loan with some lenders but your interest rate is going to be higher.
For those with bad credit, an interest rate upwards of 20% is not uncommon.
Car Loan Fees
Your car loan will come with additional fees that get added to the loan amount (unless you pay them upfront).
The most common fees include:
- Establishment fee
- Broker fee
- Monthly fee
- Arrears fees (if you miss repayments)
Fees vary significantly between lenders and is another point to discuss with your broker prior to signing your loan contract.
Balloon Payments
A balloon payment is a larger, lump-sum payment, due at the end of a car loan term.
Most borrowers use a balloon payment to reduce their ongoing repayments during the loan term.
This helps a borrower manage their cash flow and in some cases can assist in qualifying for the loan amount they require.
Loan Terms and Repayment Periods
Standard Loan Terms
Most car loans will take between three and five years to repay in full.
Seven years is usually the maximum repayment term and is only available on larger loans for eligible customers.
The longer the loan term the more interest you will pay over the life of the loan. So if you can afford the repayments you are usually better off with the shorter term.
Repayment Frequency
Most lenders allow you to choose between weekly, fortnightly, or monthly repayments.
More frequent payments can help reduce interest costs, but I think the best reason for choosing your repayment frequency is to synchronise it with your pay cycle.
Schedule your repayments for the day you receive your salary and you never have to think about it again until you get that glorious letter in the mail saying your loan has been repaid!
How Extra Repayments Save You Money
If you can afford additional repayments they can significantly reduce the interest you pay over the life of a loan.
For example, if you pay an extra $20 a week on a $30k loan @ 10% interest, then over a five-year repayment period you could save nearly $1,300 in interest!
You will also fully repay the loan 38 weeks sooner.
The Loan Application Process (Step-By-Step Guide)
Below is a brief summary of the full car loan approval process when dealing with a car loan broker.
While it may sound like a lot, we have successfully navigated this process in a matter of hours when all things are in order.
Step 1: Preliminary Assessment
A broker will gather all of the required personal information and essential financial documentation to determine what lenders are most suitable for your situation.
They will then present these options to you before progressing to a formal application.
You can kick off this step by submitting an inquiry below and our team will get to work for you.
Step 2: Submitting Your Application
Once you’ve chosen a suitable lender the broker will request any additional information that is required by that specific lender.
Your broker will also provide an explanation in advance of any issues that may be questioned in the assessment – and slow things down. For example, a default on an old phone bill you forgot about.
The broker will ensure every document is accurate and complete to avoid unnecessary back-and-forth with the lender and ensure you get fast approval where possible.
It is then time to submit your application.
Step 3: The Lender’s Review
It is now up to the lender to complete their credit assessment.
Our brokers have working relationships with a large number of lenders and speak to them throughout this process to ensure that any additional requests for information are addressed quickly.
Step 4: Final Approval
If the lender is satisfied with the application they’ll issue the approval and issue loan contracts.
There may be conditions attached to the approval which would also need to be satisfied prior to releasing the funds.
As part of this, invoices for the vehicle purchase should also be provided to the lender. Your broker will take care of this step for you.
Step 5: Funds Released
Now the funds can be released by the lender to the dealership or other seller of the vehicle.
You are now ready to pick up your new car!
Once approved, funds are transferred, and you can drive away in your new car!
Auto Finance for Different Situations
Below are some specialised scenarios where only a few lenders consider an application.
The assistance of a broker can be the difference between a successful application and a rejection.
Car Loans for Young Borrowers
If you have recently turned 18 then getting a car loan will be challenging!
You may not have a credit history at all yet and your income is the lowest it will ever be (most likely) as you are just starting your career.
Young buyers may face stricter lending criteria and only a few lenders will consider approving them.
Bad Credit Car Loans
If you have a bad credit history but have taken steps to correct past mistakes then there may be some lenders where you will be eligible for a car loan.
This is another highly specialised area and only a small number of lenders who specialise in bad credit car loans will consider your application.
However, expect higher interest rates and a lower maximum loan size.
Business Car Loans
Much of what has been discussed above is related to consumer car loans.
A business car loan process will require different documents and will have additional requirements that our brokers can take you through.
Self-Employed
Self-employed applicants may need to provide additional documentation to prove their income is consistent and will support the additional repayments of a car loan.
Tax returns over multiple years may be required as evidence that your income is sustainable over the long term despite the short-term fluctuations that may come with working for yourself.
Again, this is a specialised area where lenders will apply varying methods of assessing you for a loan.
Click the button below and get our team of brokers working for you to get the best result!
What Happens When You Pay Off Your Loan?
When you pay off your car loan any security that was registered against the vehicle can be removed.
Security is registered on the Personal Property Security Register, which is what allows people to find out if they are buying a car that has an existing loan attached to it.
That is a whole other topic, but once you have fully repaid your loan you have free and clear title of your car and can do whatever you like with it.
Conclusion
Now that you have an understanding of how car loans work you can make informed decisions on whether you want auto finance, how to apply, and what loan structure may suit you.
Finding the right deal for you requires a lot of legwork. So if you do not want to invest the time then we encourage you to get in touch with Gusto Finance today.
Our brokers have access to a large panel of lenders and can match you with the most suitable loan for your circumstances.
