How can you finance a new car?

The prospect of purchasing a new set of wheels through finance for the first time can be a daunting experience given the thousands of vehicle makes, models and car loan products available, all tailored to the differing needs of individuals, couples and families.

The most common and readily available method for those looking to finance a new car for the first time is with the help of a car loan. A car loan is a type of personal loan that allows you to borrow money from a bank or lender to purchase a new vehicle. When utilising a car loan, you enter into an agreement with the bank or lender to repay the principal amount e.g. the amount the car cost, along with interest, over a specified period of time.

With a car loan, generally the car itself serves as collateral for the loan, which means that the lender can repossess the vehicle if you were to default on the loan. This form of car loan is known as a secured car loan, while on the other hand unsecured car loans require no collateral. As car loans can be secured or unsecured, the interest rates and repayment terms can vary depending on factors such as your credit history, income, and the cost of the vehicle.

If you are concerned that you may not earn enough income or have a poor credit history, you may consider a car loan guarantor. In this case a guarantor, typically an immediate family member, agrees to vouch for your borrowing. That person must have a better credit rating than you and an excellent all-around borrower profile, because the lender will assess that when you apply. The main advantage of using a guarantor is that banks or lenders who may have previously rejected your application, would now be more likely to approve you for vehicle finance. However it’s crucial to still only borrow what you can afford, because the guarantor will be on the hook should you default i.e. fail to make successive car loan payments.

What steps should you take to obtaining a car loan?

1. Budget

Determine your budget. Figure out how much you can realistically afford to pay each month for a car loan. This will help you narrow down your options and avoid overspending.

2. Credit score

Your credit score will have an impact on the interest rate you will be offered for your car loan. Make sure to check your credit score and credit report before applying for a car loan. In Australia, you can check your credit score and report through one of three credit reporting bodies: illion, Experian and Equifax.

3. Research and shop around for the best deal

Research different lenders and compare their interest rates and loan terms. Depending on your financial situation and the type of car you want to buy, you may need to choose between a secured or unsecured car loan. InfoChoice provides a real-time comparison of car loan interest rates across a number of banks, credit unions and online lenders to help you find the best deal.

4. Pre-approval

Once you have narrowed down your options, consider getting pre-approved for a loan. This will give you a better idea of what you can afford and make the car-buying process smoother. Pre-approval can be arranged by chatting to a bank or lender and filling out an application. Generally pre-approval requires a bank or lender to conduct a soft credit check on your credit history to ensure your suitability as a potential borrower.

5. Gather documentation

Before you officially apply for a loan, make sure you have copies of all necessary documents. These include:

  • 100 points of identification (at least): This can include your driver’s license, passport, Medicare card, etc.

  • Proof of residence: This can include a utility bill, proof of enrollment to vote, etc.

  • Proof of income: This can include a current bank statement, two or three recent payslips, proof of employment and your employers’ contact details. If you’re self-employed, you’ll generally need to provide two years’ worth of tax returns.

  • Assets and liabilities: Such as details on any property you may own, other loans you might have, any debts (such as credit cards) etc.

  • The vehicle details: You'll likely need to provide the make, model, registration number, and price of the vehicle, as well as whether it's new or used.

6. Apply for the loan

Once you have chosen a lender and a loan type, submit your application and wait for formal approval.

7. Purchase the car

If you are approved for the loan, you will need to sign necessary loan documentation. Make sure to read and understand the terms and conditions of the loan before signing any contracts. The lender can then proceed to finalise the purchase of a vehicle with a dealership by transferring them the funds.

Car loan costs to consider

There are a number of costs to consider associated with a car loan, beyond simply the amount you will pay in interest. We’ve broken some of the most significant costs down below.

Application or establishment fees

Car loan application or establishment fees are fees charged by lenders to cover the costs of setting up the car loan. These fees are usually charged upfront when you apply for the loan, and they can vary depending on the lender and the type of loan you're applying for.

The cost of application or establishment fees ultimately depends on the lender and the type of car loan. Generally car loan application fees can range between $100 to $500, with an average across the market of about $200. Some lenders may waive this upfront fee or charge $0 for all customers, however it’s important to remain on your toes as lenders may make up for this by charging a higher interest rate.

Ongoing fees

Lenders may require you to pay a recurring fee, which can be charged monthly, semi-annually or annually. These fees charges are generally referred to as maintenance fees, monthly or annual fees. Regardless of the name, ongoing fees can accumulate considerably over time, exceeding the cost of any other fee.

Loan processing fees

Car loan processing fees are typically charged by a lender to cover the administrative costs associated with processing a car loan application. This fee is likely to be charged upfront when you apply for the loan, however this will vary depending on the lender and the type of loan you're applying for.

Early repayment fees

Early repayment fees are charged by a lender if you pay off your car loan earlier than the agreed-upon repayment term. For example, if your agreed-upon car loan term is 5 years and you manage to pay off the loan in 3 years, then a lender may require you to pay an early repayment fee. This fee is charged to compensate the lender for any interest they would have earned if you had made payments for the full loan term.

Car loan early repayment fees can vary depending on the lender and the type of loan you have. While some lenders may charge a percentage of the remaining loan balance, others may charge a fixed amount or even offer no early repayment fees.

Missed repayment fees

Sometimes life happens and you may miss a car loan repayment courtesy of an unexpected expense arising. In this case, a lender may charge you a fee for failing to meet repayments on time. This can be avoided by setting up a direct debit for your car loan repayments, asking your lender to schedule your repayments at a more convenient time (such as when you get paid), or asking for an extension on your repayments.

Tips to help you obtain the best deal

To help you get into a new car sooner by using a car loan, below are some tips to consider before signing on the dotted line.

  • Shop around: Don't just accept the first car loan offer you receive. Shop around and compare offers from different lenders to find the best deal. Consider factors such as interest rates, fees, repayment terms, and loan features. InfoChoice offers the ability to compare a number of lenders and their car loan products to help determine which is best suited to your finances.

  • Check your credit score: It may seem unnecessary, but your credit score plays a major role in determining the interest rate and terms of your car loan. Checking your credit score before applying for a loan can provide an idea of whether you may be eligible for a better interest rate. The higher the credit score, the greater your chances of achieving a sweeter car loan deal.

  • Consider opting for a secured loan: A secured car loan where the vehicle serves as ‘security’, may offer lower interest rates compared to unsecured loans. If you can provide a form of security, such as the vehicle itself, you may be able to secure a better loan deal.

  • Have a significant loan deposit: Having a larger car loan deposit can lower the amount you need to borrow and reduce the total cost of the loan.

  • Negotiate terms: Don't be afraid to negotiate the terms of your car loan. Ask the lender if they can offer a lower interest rate or reduce fees - you won’t know if you don’t ask!

  • Read the fine print: Be sure to read the loan contract carefully to ensure you understand all the terms and conditions before signing on the dotted line. Look out for hidden fees, early repayment fees, and other details that may influence the total cost of the loan.