A step-by-step guide to getting a car loan
Applying for a car loan can sometimes be more overwhelming than buying the car itself, with all the research and paperwork involved.
But getting a car loan can be much easier these days and can be done relatively quickly online. And by following the right steps, you might even have the upper hand when negotiating a car purchase.
To help you buy your dream ride, RateCity has put together a step-by-step guide to applying for a car loan.
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. However, your credit rating is one of the main factors that determines your chances of being approved as well as your interest rate. The higher your credit score, the more likely you may be approved for a car loan and the lower your interest rate may be in some cases.
Step 2: Do your research
One of the best ways to prepare yourself for a loan application is to do sufficient research. Use online tools and calculators to help you work out the numbers conveniently. Some of the things you might want to look into are:
- The price range for your next car.
- How much you might be able to borrow, based on your financial standing.
- How much your potential car repayments could be.
- The term you want to repay your car loan over.
- Any other potential upfront or ongoing costs (e.g. insurance and maintenance) you may face.
Step 3: Compare car loans
As part of your research before making a loan application, take the time to compare car loans on the market to find one that’s right for you. It’s 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 – both the advertised rate and comparison rate.
- Fees – such as application fee, monthly fees, early exit fees etc.
- Features – including the ability to make extra repayments and pay off the loan early.
- Loan term – usually between one to seven years.
- Loan type – secured or unsecured.
- Lender type – you could consider going to a bank, non-bank lender, peer-to-peer lender, car manufacturer or dealership.
Step 4: 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 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 still needs to assess your financial situation before giving the initial green light, so it’s a good indication of whether you’d be approved, though it’s in no way a guarantee.
Pre-approval gives buyers 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 over stretching your budget.
Step 5: 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. Things to take note of are the vehicle’s age, mileage and model.
The specific documentation required and application process may vary from lender to lender, but you can expect to be asked for:
- Personal information and identification – drivers’ license and/or passport.
- Proof of income – recent payslips, tax returns, and as bank statements that show income and expenses.
- Proof of assets and liabilities – credit card statements and details of any other loans you have, including mortgages or personal loans.
- Information about the car you’re buying – vehicle details, contract of sale, car registration and proof of insurance.
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.
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Previously a financial writer for RateCity, Alison Cheung specialised in housing and real estate. Since 2015, she has written about commercial and residential property for Domain Group and NewsCorp in print and online, and has been published in both Domain and RealEstate.com.au. Alison is passionate about property investment and innovations in the real estate industry, and firmly believes in the most basic yet vital financial advice ever given: saving for a rainy day.
Learn more about car loans
What is a secured car loan?
A secured car loan is a loan that is connected to a form of security, or collateral. Generally, the security for a car loan is the car itself. If you fail to repay the loan, the lender might seize your car, sell it and then use the proceeds to recover their debt.
Where can I get a student car loan?
Student car loans are not a necessarily a product in and of themselves, but what you may be looking for is a guarantor car loan.
A guarantor car loan has a third-party act as a form of guarantee for your loan application, telling the bank or lender that if you default on your loan, someone will pay the loan repayments.
Going guarantor on a car loan is no new thing, and before internet-based credit scores, guarantor car loan applicants would apply for loans with a guarantor or property owner who could vouch for the person borrowing the loan.
To get a guarantor car loan, you’ll need someone willing to act as a guarantor for your car loan.
I’ve been denied a car loan before; can I still get car finance?
Even if you’ve been denied a car loan before, you might still be able to get car finance. The key is to make the right application to the right lender.
The ‘right’ application is one that makes you look like an acceptable risk, which might include things like improving your credit score, increasing your savings rate and accumulating a bigger deposit.
The ‘right’ lender is one that deals with borrowers like you. For example, while some car loan lenders only deal with good credit borrowers, there are others that specialise in bad credit or poor credit borrowers.
How to find a great car loan
Historically, finding a great car loan would require excess research ranging from visiting an excess of websites or making phone calls, but technology has moved on. Using RateCity, Australia’s leading financial comparison service, you can check out great deals from a range of lenders on the one site.
To start, select the amount you want to borrow and the length of the loan, narrowing your search to show just fixed or variable interest rate results.
Once you’ve indicated your search criteria, you’ll see an immediate list of lenders, ranked by interest rate or application fees. You’ll also be able to view the monthly repayment amount for each result, helping you to know what you can afford.
Up to six products can be compared side-by-side, complete with more information about each car loan, giving you more information about your options.
When comparing your car loan options, it’s ideal to keep in mind some points find a great car loan for your needs. Consider the following:
- Choosing a low interest car loan can reduce costs
- Selecting an option with low fees and charges is ideal, because these can really add up
- Be aware of penalties, such as early exit penalties if you pay off the loan sooner than expected
- Consider the features that best suit your situation
There are many ways to ensure that you get a great car loan. Ultimately, you’ll end up with the best deal by doing your research and selecting the most suitable product for you.
How do you get a car loan?
There are four different ways you can get a car loan. You can go straight to a lender. You can get a finance broker to organise a car loan for you. You can get ‘dealer finance’ – which is when the car dealer organises a car loan for you. Or you can organise your own car loan through a comparison website, like RateCity.
Whichever method you choose, you will need to provide proof of identification, proof of income and proof of savings. So you may be asked for any combination of passport, driver’s licence, bank statements, payslips, tax returns and utility bills. You might also be asked to provide proof of insurance.
What is a guarantor on a car loan?
A guarantor on a car loan is a third party, usually a relative or friend, who guarantees to meet the repayments of a loan for the purchase of a car, if the borrower/owner of the car defaults on the loan.
Guarantor car loans can be useful for people who would otherwise struggle in being accepted for credit to purchase a vehicle. These may include people with bad credit, students and young people who may have no credit history, as well as some pensioners.
Many lenders offer guarantor car loans, guarantor personal loans and guarantor home loans, because of the significantly reduced risk to the lender.
What are the pros and cons of guarantor car loans?
Like all things, there are positives and negatives to guarantor car loans, though one may outweigh the other depending on your needs.
Guarantor car loan pros may include that you’re more likely to be approved for a long if you have no credit or a history with bad credit, that you’re more likely to secure a car loan with a lower interest rate, and that because your guarantor car loan is based on a relationship, you will be more inclined to meet your repayment schedule.
However, there are negatives, as well. Guarantor car loan cons may include leaving a detrimental mark on a personal relationship with added strain if you don’t meet your repayments, and you may take out a loan that you can’t actually afford.
Weighing these pros and cons will give you a greater understanding of whether a guarantor loan is ideal for your circumstances.
What is a guarantor car loan?
A guarantor car loan is a type of loan that features a guarantor on the agreement. The guarantor is a third-party individual, often a friend or relative, who guarantees the loan will be repaid if the borrower defaults on the car loan.
Guarantor car loans are often geared at people who might otherwise struggle being accepted for a secured car loan when purchasing a vehicle. Some of the reasons might include a lack of credit history such as with a student or young person, if there’s bad credit, or age as a factor such as with pensioners.
What is a refinance?
A refinance is when you swap one car loan with another. For example, you might take out a car loan with Lender X because it is the best on the market at the time – but two years later, you might switch to Lender Y because you discover that it now has the best loan. Conditions and fees often apply when you refinance.
Can I get a discounted student car loan?
Being a student is tough enough, and while you might find the odd student discount on movies and technology, the same can’t be said about car loans, as you can’t really get a discounted student car loan.
Lenders make money on the interest and fees that they charge with loans, and the lowest interest and fees are given to the most reliable credit holders: people with excellent credit history.
As a student, you are unlikely to have enough on your credit report to warrant an excellent history. There are however, ways of getting a lower interest car loan if you can’t get an interest-free loan from the bank of mum and dad. One way of doing this may be through getting a guarantor car loan, which can get you a secured car loan by setting your parents up as guarantors.
Can I get a car loan with poor credit?
Poor credit doesn’t necessarily mean you won’t be able to get finance for your car purchase, though your options aren’t likely to be the same as someone with good credit.
In fact, a number of specialist lenders exist offering car finance for customers with poor credit, able to provide access to bad credit car loans.
However having a history of poor credit will likely mark you as a potential risk to lenders, so your car financing needs could see higher fees and interest rates. Alternatively, consider a secured car loan, which is a type of loan that uses the car you purchase as collateral, reducing the risk.
Other options include getting someone close to act as a guarantor for your car loan, or to talk to a broker about a personalised rate specific to your circumstances.
How much is your car worth?
If you already own a car, you could potentially bring down the cost by selling your car in the process. Before that happens, though, you’ll need to find out how much your car is worth.
One of the first places to find this value is to research the value of your current car, giving you an idea of roughly how much it’s worth in its peak condition.
There are plenty of websites that offer a free online valuation, allowing you to enter your car’s make, model, year, badge and description, with results listing a price guide based on both selling your car privately and through a dealership.
Of course, dealerships will try to profit on your trade-in by buying it for less than they can sell it, making it highly unlikely that you’ll get the same price selling a car to a dealer as you would selling a car privately.
However, private car sales can be costly and can take months to sell, making car trading more convenient with a guaranteed return, even if you may not be able to realise the total value of your car’s worth.
Remember that everything is negotiable. If the dealership is offering you less for your trade than you wanted, try to negotiate elsewhere to gain that money back. Start by negotiating on the price of the trade and then ask them if they can give you a further discount on your new car.
Can I buy a car as a student?
Buying a car is a huge financial decision, and shy of marriage and purchasing a house (or perhaps around the world travels), it may be the biggest financial decision you make. But if you’re looking at your empty pockets, don’t despair! Your dream of owning your own car could become a reality, if you look for and compare the right car loans for your circumstances.