Throughout their more than 130 year history, cars have represented different things to different groups of people. At first, cars were considered a luxury item and only attainable by the uber-wealthy. The first cars may have represented the high social status of their owner, but as time rolled on and cars became more of a common sight on the road, automobiles began to symbolise freedom as well as a must-have modern convenience.
These days cars have come to represent all these qualities and much more. Some people still buy expensive cars to highlight their standing in society, whilst others buy a vehicle that will allow them the freedom to travel and explore. However, for most people, buying a car is a matter of necessity. Getting from point A to point B, and without owning a car many people would be stuck and unable to get to work, school, etc. So when the time comes to purchase your trusty new vehicle, it’s time to put your best foot forward in applying for a car loan.
And herein lies the dilemma. You need that new car to make your life better. But how can you be sure you’ll get approved for a car loan? While car ownership may have become more democratised, getting approved for a car loan is still not always easy. If you're worried about whether or not you'll be approved for a car loan, keep reading to learn all the dos and don'ts of getting a car loan application approved in Australia in 2022.
Following the 5 tips we’ve outlined below is a great way of ensuring you’ll get a car loan application approved so you can get on your way sooner in your new car!
Tip #1 - Know your credit score
The first step in increasing your chances of being approved for a car loan is understanding your credit score. Your credit score is a number between 0 and 1200. It is calculated by Australia’s largest reporting credit bureau Equifax, and based on your credit file, or history of handling credit. For instance, it takes into account such things as how much money you have borrowed in the past, how many loan applications you’ve made and whether or not you’ve made your repayments on time.
The higher your credit score, the better your credit position. And the better your credit position, the more likely you are to be approved for a car loan (and the better interest rate you'll get).
It makes sense to have done your own credit checks before approaching different lenders, as this is the process they use to determine your eligibility for a car loan. An excellent score of more than 833 means you present a very low risk to a lender and will have no problems getting your car loan application approved. Plus, you will have access to a wider range of credit products. A credit rating between 726 and 832 is considered very good. This means you are among the top 40% of Australians when it comes to creditworthiness. You will find a range of lenders only too happy to offer you a car loan. Those with scores that range from 622 to 725 are classed as having a good credit history. This type of credit rating stands you in good stead of having a car loan approved, plus you can still access lower interest rates. A score within the 510 to 621 range is deemed as average. Additional loan requirements will usually be instated due to some negative aspects of your credit history. Anything below 510 is categorised as below average. Lenders will see you as higher risk, you can still secure a car loan in this bracket but you may encounter higher interest rates due to this.
Once you know your credit score you are in a better position to shop around for the best lender and the best interest rate. Not everyone gets approved for car finance. If you have a bad credit file and your credit rating is below average, there are actions you can take to improve this before you apply for a car loan. If you would like to know more about how to improve a bad credit score, check out the information supplied by moneysmart.gov.au to help you get your debt under control.
Tip #2 - Know your budget
Before you start to compare loans and go on test drives, it’s crucial that you know how much room there is in your budget for car loan repayments. Also, don’t forget that the total cost of car ownership extends further than the purchase price of the vehicle. You will have to factor into your budget things like fees to have your car serviced, registration and car insurance costs, as well as running costs like fuel and maintenance.
So, if you don’t have a budget that you can factor all these ongoing fees and costs into, there is no better time to begin than the present. You can check out the free budgeting tool here and get a better idea of the type of car and car loan you can afford.
The general rule of thumb is to keep your car repayments at or below 20% of your monthly take-home pay. Whilst there is no minimum income test associated with getting a car loan, obviously the higher your personal income the better the chances of getting a great loan. So, in the absence of securing a higher paying job, make sure your current financial circumstances are as optimised as possible.
Read more: How Much Should You Spend On a Car?
Tip #3 - Find a lender that specialises in car loans
Many lenders offer car loans, but not all car loans and lenders are created equally. Finding a lender that offers competitive rates and terms will help you into a new car more easily and affordably. Once you've found a few potential lenders, it's time to start the application process. To do this make sure you have all the required documentation in order. Things like your driver's licence, proof of identity, proof of income, as well as any other required documents.
The better prepared you are, the better your chances of getting the tick of approval from car loan providers. Especially if you are self employed, car loan specialists can help you jump through all the hoops of proving your income much more easily compared to other types of lenders.
Another useful piece of advice is to have a guarantor ready if necessary. If you have bad credit or no credit, having a guarantor can greatly increase the chances of your loan being approved. By law the guarantor must be aged over 18 as well as an Australian citizen. And they must have a better credit score than you. Otherwise, lenders will not approve your application.
Here at Driva we do all the heavy-lifting for you, we work with over 30 different lenders to ensure that the choices you're seeing are a good fit for the car you're considering and your unique situation. Not all lenders were born equal, which means some have slower response times and worse support functions than others, but we’ve hand-picked those that we work with to support our vision of a seamless customer experience and great rates across a range of different scenarios.
From truck finance to a green car loan we can help, you can get started here to view your personalised rates and lowest monthly repayment figures from multiple lenders.
Tip #4 - Get pre-approval
Getting pre-approved for a car loan before you visit the dealership puts you in a stronger negotiating position. It also makes you aware of what your budgetary constraints are. If an unscrupulous dealer tries to take advantage of you by offering you dealer finance at an inflated interest rate or adding hidden fees to your loan, you’re also covered.
Car loan pre-approval means your lender has given you an in principle agreement to finance your car purchase. Similar to a credit check, the lender will assess your financial circumstances and ability to make repayments before letting you know how much they are willing to lend. How much you get approved or pre approved for a car loan hinges on a variety of factors. The credit provider will check the following:
- whether or not you have personal loans or other loans
- what your monthly fees and expenses are
- your credit report
- whether you have a bad credit history
- your risk profile
- proposed loan amount.
Once you gain pre approval for a car loan, it’s time to go car shopping! Let the dealer know you’ve been pre-approved. This will help confirm to them that you’re a serious buyer. They will be more likely to enter into price negotiations with you to close the deal.
Tip #5 - Keep your car loan as short as possible
Whilst it can be tempting to extend the term of your car loan so that repayments are more manageable, this isn’t always a good idea. The longer the term of your car loan, the more interest you will pay in total. If you opt for a shorter term car loan and make higher repayments each month, not only will it save you money in interest, but you’ll also own your car outright sooner.
Another thing to keep in mind is that car loans may not always be the best way to finance a car depending on your personal circumstances. If you have the savings, in some circumstances it may be better to pay cash for your car outright. This will mean that you won’t have to pay any interest on your loan and you’ll own your car outright from the get-go. Otherwise, you could always take out a personal loan.
If you do need to take out a loan to buy a car, make sure that you shop around for the best deal. As with any major financial decision, it’s important to do your own research. Working out which loans will incur a higher interest rate and which loans will attract a lower interest rate should be your first port of call.
There are many different lenders out there and each one will offer different interest rates and terms. It’s important to get the best comparison rate and weigh up all your options before settling on any one loan.
Following the tips we’ve outlined above means you'll be able to answer the quintessential question “will I get approved for a car loan?” with a resounding yes!
To get to this point, let’s review:
- car buyers with better credit scores are in a much more advantageous position to negotiate
- improving your financial situation by creating and sticking to a budget will improve your ability to secure a great car loan
- finding a credit service provider that specialises in car loans helps streamline the overall car loan application process
- getting pre-approved before visiting the car dealership lets you know your budget and tells the dealer you’re serious
- opting for a shorter-term car loan and making higher repayments saves you money and you will also have nothing left to pay on your car sooner.
There are some things that make it less likely to get approved for an auto loan in Australia. These are bad credit history, applying for too high a loan amount, not having enough income, having too many monthly expenses, incorrect personal information submitted or being deemed a credit risk for other reasons.
If you’re worried that your car loan might get denied even after it’s been approved, don’t. The simple fact is that this can happen but it’s an extremely rare occurrence in Australia. If this situation does happen to you, it’s probably an issue with the fine print or an application error. And this can be easily fixed, whether by reapplying with the same credit provider or finding someone new.
We hope this guide has helped you understand the car loan approval process a little better and allay any fears you may have had. So now that you know how to get approved for a car loan, go out there and get the car of your dreams! You’ve earned it!