A step-by-step guide to getting a car loan
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Just when you’ve ended the hunt for your dream car, you might find yourself faced with another major decision: add-on financial products.
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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.
Bad credit hub
Do you have bad credit? Find out more about getting a loan with bad credit at RateCity's bad credit hub.
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.
A financial writer for RateCity, Alison Cheung specialises 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.
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Yes, there are some lenders who will consider your application if you are on a disability pension. As long as you have an income, usually of over $400 a week, there are lenders that are willing to supply you with a loan. There are also microfinancing charitable organisations that provide low interest loans for people on low incomes for certain necessary amenities, such as cars, if they match the specified criteria.
A car loan, also known as vehicle finance, is money that a consumer borrows with the express purpose of buying a vehicle, such as a car, motorbike, van, truck or campervan. Car loans can be used for both new and used vehicles.
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.
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.
There’s no set number. That’s because borrowing capacity differs from person to person, as well as lender to lender.
Lenders don’t give out car loans unless they’re confident they’ll be repaid. Each person is different, so the amount of money one person can successfully borrow will differ from another person’s number. Also, each lender uses its own formulas to calculate borrowing capacity – so Mr & Mrs Smith might find that while Lender X will give them a car loan for $20,000, Lender Y will offer only $18,000.
The interest rate is the price you have to pay for borrowing money. The interest rate is expressed as an annual percentage of however much of the loan remains to be paid. For example, if you took out a $10,000 car loan with an interest rate of 8.75 per cent, you would be charged 8.75 per cent of $10,000, or $875 of interest per year. But if you then reduced the outstanding loan to $9,000, your annual interest bill would be 8.75 per cent of $9,000, or $787.50.
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.
The comparison rate is known as the ‘real’ interest rate you have to pay – unlike the advertised interest rate, which is often an artificially low number. That’s because the comparison rate includes both the advertised rate and the associated fees. According to the industry standard, comparison rate calculations are made on the assumption that the car loan will be for $30,000 over five years.
A pre-approval is a formal document that indicates how much a lender is willing to lend to a consumer – once that person has found the car they want to buy. A lender will assess a borrower’s credit history and financial circumstances before issuing a pre-approval. However, lenders are under no obligation to follow through on pre-approvals, so pre-approvals should be seen as statements of intent rather than rock-solid guarantees.
Repayments are the regular payments you make to pay off your car loan. Repayments generally occur on a monthly basis, although many lenders will also give you the option of making fortnightly or weekly loan repayments.
The trade-in value is the price you could realistically charge if you were to sell your car to a dealer while buying a replacement vehicle. Generally, a car’s trade-in value is less than its market value. That’s because the dealer has no interest in buying your car unless it can make a profit – which can only be done if the dealer has room to increase the price.
Comprehensive insurance protects you in the event you’re responsible for a car accident. Policies vary from provider to provider, but comprehensive insurance generally covers you for damage to your car and property, as well as the other parties’ cars and property. A comprehensive insurance policy may also protect you from theft, vandalism and natural disasters.
Collateral, or security, is an asset you agree to surrender to a lender if you fail to repay a loan. Generally, the collateral for a car loan is the car itself. So if you fail to repay the loan, the lender might seize your car, sell it and then use the proceeds to recover their debt.
Borrowing capacity is the amount of money that a consumer is able to borrow from a lender. Each consumer’s circumstances are unique, so different people will have different borrowing capacities. Lenders use their own in-house formulas to calculate borrowing capacity, so the same consumer might have different borrowing capacities at different lenders.
Finance brokers help borrowers organise car loans with lenders – that is, they act as middlemen between borrowers and lenders. While lenders will only recommend their own products, finance brokers recommend products from a range of lenders. Finance brokers need to be accredited with a lender to do business with that lender; a typical broker will be accredited with between 10 and 30 lenders. Finance brokers generally don’t charge consumers; instead, they receive commission payments from lenders.
Some lenders will charge you an establishment fee, or one-off upfront fee, to cover the cost of setting up your car loan.
A variable-rate loan is one where the lender can change the interest rate whenever it wants. For example, if you sign up for a variable-rate loan at 8.75 per cent, the lender might change the interest rate to 8.90 per cent the month after and then 8.65 per cent the month after that. By contrast, if you take out a five-year fixed-rate loan at 8.75 per cent, the lender is obliged to leave your interest rate at 8.75 per cent for at least five years.
An upfront fee is a one-off fee that many lenders charge when you take out a car loan.