How to find a loan for your first car

Buying your first car can be an emotional experience, and also an expensive one. Even second-hand cars can cost more than many first-time buyers can comfortably afford.

Taking out a car loan could give you more vehicle options to choose from when choosing your first car. Provided you can afford the repayments, you may be able to start driving in style and preparing for your financial future.

Getting preapproval for a car loan can potentially give you a much bigger budget for buying your first car. This can greatly widen your search for an ideal vehicle, whether you’re buying privately or through a car dealership. Cars with higher price tags are far more likely to be nicer vehicles, which are more likely to last for longer, potentially costing you less in maintenance, repairs and servicing. 

Also, using a car loan to buy your first car could potentially make a positive impact on your financial future. Successfully applying for a car loan and keeping up with the repayments can help to build your credit history, which could help to put you in a better position to borrow more money in the future.

You may also have the option to refinance your car loan in the future, which could allow you to trade in your first car for another model that better fits your changing personal and financial situation. 

On the other hand, cars are often depreciating assets, where their value goes down over time. Taking out a loan to buy your first car could mean paying much more than the car may be worth by the time you finish paying off the loan.

Used cars tend to be more affordable than new cars, meaning they tend to be closer to the end of their lifespan. Buying a used first car could mean risking seeing your first car written off if it suffers a breakdown, leaving you stuck with the loan.

Finally, the first car you buy is unlikely to be the last car you buy. Taking out a car loan for this vehicle could see you locked into a long-term debt, especially if your use balloon payments and/or refinance the loan to upgrade to newer models over time. The longer you hold a car loan, the more you’ll pay in interest, fees and other charges, so it’s important to consider if your first car is really worth these extra costs.

Many vehicle finance providers use the value of the car you’re purchasing to secure the loan. In a secured car loan, if you can’t keep up with your repayments, the lender will repossess and sell the car to recover the loan balance. Because this helps to reduce the lender’s risk, secured car loans often have lower interest rates and fees than unsecured car loans. However, you may be limited in your choice of cars you can purchase, as you’ll need to be buying a vehicle with enough value to secure the loan – this often means no older used cars, which are often more affordable than the more valuable newer cars.

You may also be able to apply for an unsecured car loan, which doesn’t require the vehicle or any other asset to be used as security. This can open up a wider variety of vehicle choices, including older used cars and other models that may not fulfil the requirements for a secured car loan. However, because most lenders consider unsecured car loans to be riskier than secured car loans, you’re more likely to be charged a higher interest rate and/or fees. Also, you may need to have an excellent credit score to be eligible for an unsecured car loan. If you haven’t yet had a chance to build up your credit history, this could limit your available options.  

Unlike home loans and some other types of finance, most car loans don’t require you to pay an upfront deposit or down payment. But if you can afford to do so, this can quickly reduce the loan principal to pay off over time, which could help you to save money in interest charges over the long term.

Different car finance providers may have different eligibility criteria, but some of the common requirements include: 

• Personal information: Details of your identity and residence. You need to be over 18 to apply for a car loan.
• Car details: Make, model, age, condition etc. If you haven’t yet found a car, you may be able to apply for car loan preapproval without these details. Once you find a car to buy, you may need to provide its information before finalising the deal, so the lender can confirm that the car’s value will be enough to secure the loan.
• Income and expenses: Bank statements and other financial statements to show how much you earn from your job, and how much of your income already goes towards paying ongoing costs.
• Assets and liabilities: Statements detailing any other valuables you may already own (e.g. vehicles, property, shares, superannuation etc.) and other debts you may already owe (e.g. personal loans, credit cards).
• Insurance details: Some car finance providers require a comprehensive insurance policy to be in place before they’ll approve a car loan application.

If you won’t fulfil all of a lender’s requirements to apply for a car loan, that doesn’t mean you’re completely locked out from car finance. You may still be able to successfully apply for a car loan if someone agrees to guarantee your loan. In other words, if you’re unable to keep up with your car loan repayments, your guarantor will become responsible for your car loan.

Most car finance companies will only accept close family members such as your parents as guarantors. Additionally, your guarantor will likely need to have an excellent credit score, a strong income, and a good debt to income ratio. But if you can find a guarantor who fulfils these requirements, you may be able to apply for car loans you may not otherwise be eligible for, potentially even options with lower interest rates and fees.  

Before you apply for your first car loan, it’s important to compare the available options and consider which choices may best suit your financial situation and personal goals.

Some of the car loan features to compare include:

• Interest rate: How much you’ll pay in interest charges on the loan.
• Comparison rate: Combines the cost of interest and standard fees and charges into a single figure, to give you a better idea of the loan’s overall cost.
• Other fees and charges: Some car loans may charge other fees that aren’t included in the comparison rate.
• Extra features and benefits: Are you able to make extra repayments onto the car loan, to help pay off your car faster and pay less interest over time? Can you redraw these extra repayments if you need the money back in your bank account?
• Fixed or variable interest rates: Will your interest charges stay the same over your loan term, or potentially rise and fall?
• Secured or unsecured: Will the value of your vehicle secure the loan, or are you getting a loan with no collateral requirements?
• Term length: A shorter car loan often means higher monthly repayments, but paying less interest in total. A longer car loan can mean more affordable monthly repayments, but you may pay more interest over the long term.