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How to get a car loan and increase your chances of being approved

Mark Bristow avatar
Mark Bristow
- 8 min read
How to get a car loan and increase your chances of being approved

Applying for a car loan can sometimes be more overwhelming than buying the car itself, with all the research and paperwork involved. And even once you’re ready to apply for a car loan, there’s no guarantee that your application for car finance will be approved.

When somebody applies for any sort of loan, the lender tries to figure out how they’d get their money back. Applications usually get approved when the lender concludes the borrower has a realistic chance of repaying the loan, and rejected when the lender thinks otherwise.

But getting a car loan doesn’t have to be hard. If you’re well-prepared and follow the right steps, you can apply online, over the phone, or in person and be confident that your application is more likely to receive approval, which might give you the upper hand when negotiating a car purchase.

To help you buy your dream ride, here’s a step-by-step guide to applying for a car loan and improving your chances of being approved:

Step 1: Check your credit score

Checking your credit score is possibly one of the most overlooked steps in getting any kind of personal financing. It’s a number that most people don’t think too much about, despite it being unique to you.

Your credit score is based on your history of borrowing and repaying money. If you pay your bills and credit repayments on time, you may have a good credit score. But if you’ve missed or defaulted on repayments in the past, you may have a poor credit score.

Lenders use your credit score as a shortcut to assess the level of risk that may be involved when lending you money. This makes your credit rating one of the main factors that determines your chances of being approved for a car loan, as well as the interest rate you may be offered. The higher your credit score, the more likely you may be approved for a car loan, and the lower the interest rate you may be offered.

You can check your credit score for free to get a better idea of how a lender sees you before you apply for a car loan or any other credit product. If there are any mistakes in your credit history, you can contact the parties involved to get these corrected. And if your credit history isn’t the best, you could take some time practising good credit behaviours to hopefully improve your credit score over time.

Step 2: Do your research

One of the best ways to prepare yourself for a loan application is to research. Using online tools and calculators, you may be able to work out:

  • The price range for your next car
  • How much you might be able to borrow, based on your income and expenses
  • How much your potential car repayments could be
  • The loan term you want to repay your car loan
  • Any other potential upfront or ongoing costs (e.g. insurance and maintenance)

Step 3: Compare car loans

Before making an application, take the time to compare car loans on the market to find one that’s right for you. It’s often a good idea to do this before you even start looking at cars.

Here are some features of a car loan you should be weighing up:

  • Interest rate: Look at both the advertised rate (how much interest you’ll be charged on the loan) and comparison rate (combines interest with standard fees to give you a better idea of the loan’s overall cost).
  • Fees: These may include application fees, monthly fees, early exit fees and more.
  • Features: These may include the ability to make extra repayments and pay off the loan early, which could help you save money on total interest charges.
  • Loan term: Car loans often run for between one and seven years. A longer loan term means lower monthly repayments, but paying more interest on the loan in total, and vice versa.
  • Loan type: Car loans are often secured by the value of the vehicle being purchased, which can mean a lower interest rate. Unsecured car loans are also available, which often have fewer restrictions but higher interest rates.
  • Lender type: You could consider going to a bank, non-bank lender, peer-to-peer lender, car manufacturer or dealership.

Step 4: Collect your documents

When you apply for a car loan, lenders will ask for a range of documents to help them assess your repayment capacity.

Different lenders will ask for different things, some of the paperwork they’re likely to request includes:

Proof of identity

No lender will approve a loan unless you can prove you are who you say you are. You’ll probably be asked to provide 100 points of identification.

A passport and a driver’s licence will typically get you over the line, as will a passport, Medicare card and utility bill.

Proof of residence

As part of establishing your identity, lenders will want to confirm your address.

This could be done with a utility bill, council notice, tenancy agreement or mortgage statement.

Proof of income

Once lenders have confirmed your identity, they’ll want to make sure you’re earning enough income to repay the loan.

You might be asked for any combination of payslips, bank statements, a group certificate, and a tax return.

Proof of savings

Repaying a loan isn’t just about how much money you earn – it’s also about how much of that money you spend.

Lenders like to make sure potential customers are capable of saving, so don’t be surprised if they ask for bank statements and investment documents.

Proof of liabilities

Lenders will also want to know about your debts, so they can get a complete understanding of your financial position.

That means you’ll probably be asked to provide copies of credit card statements, loan agreements and the like.

Car details

If you plan on applying for a secured car loan, the lender will want to be confident that the value of the car being purchased will be enough to secure the loan in case you default on your repayments.

You may need to provide details or the car you're buying, including its make, model, age, kilometres travelled, and overall condition. These details may be found in the contract of sale and car registration.

Proof of insurance

Some lenders won’t give you a car loan if you don’t have comprehensive insurance, because you might struggle to repay the loan if you were suddenly hit with a damage claim.

As a result, you might be asked to provide insurance documents as part of your car loan application.

Step 5: Apply for pre-approval

While pre-approval is an optional step in the car loan application process, it may be helpful for some people. Pre-approval is when a lender agrees in principle to lend you a certain amount of money before you purchase a car, while still allowing you or the lender to back out if either one of you changes their mind. The lender needs to assess your financial situation before giving this initial green light, so it can be a good indication of whether you’d be approved, though it’s in no way a guarantee.

Pre-approval can give you a clear idea of how much you can really afford. Armed with this knowledge, you can head to a car dealership or approach private sellers with better confidence that you won’t be overstretching your budget.

Step 6: Secure full loan approval

After gaining pre-approval and making your mind up on the car you want, you’re ready to apply for the real deal. You should make sure the vehicle you’ve chosen is qualified for the car loan you’re applying for. When car shopping, take note of the vehicle's age, kilometres travelled, make and model.

How long it takes for a decision to be made will depend on the lender and whether it’s a straightforward application. Sometimes, the lender may need more information from you, which may drag out the waiting time. The more information you can provide a lender up front, and the more accurate and detailed the documentation you provide, the less likely the lender would need to halt the application process to check something with you.

If you aren’t certain whether your car loan application may be accepted by a lender, another option to consider could be to get help from a car finance broker. Similarly to mortgage brokers, these experts can help you work out which car loan options may best suit your financial situation and personal goals, and negotiate with lenders on your behalf to help you get the best deal for your needs. They can also help you complete your application, making sure you have all the necessary documentation to maximise your chances of car loan approval.

Compare car loans in Australia

Product database updated 25 Jun, 2024

This article was reviewed by Personal Finance Editor Alex Ritchie before it was published as part of RateCity's Fact Check process.