Car Loan Eligibility

Wondering about applying for a car loan? Find out if you’re eligible to apply using our handy guide.
No obligation. It won't affect your credit score.
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, updated on June 30th, 2023       

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Car loan eligibility explained

Knowing if you are eligible for a car finance can avoid any shocks when applying for loans through brokers or lenders. The bare minimum eligibility requirements for car loans are holding Australian citizenship or permanent residency, being over the age of 18, and earning some type of income. Though the first two criteria are set in stone, the third type of eligibility has a more flexible definition among lenders. Other eligibility criteria can apply too, which we will explain in more detail.

What is car loan eligibility criteria?

Car loan eligibility criteria are the requirements a borrower must meet to be considered for car finance. As mentioned earlier, the base minimum requirements are being over 18, Australian citizenship (or permanent residency), and earning income. However, as part of responsible lending, lenders are required by law to ensure any loan product they approve will not put the borrower at harm of financial instability or risk.

Car finance eligibility criteria can vary from loan product to loan product. For example, applying for an unsecured car loan over a secured car loan will have more restrictive criteria when it comes to credit scores. Since these types of car loans are not tied to collateral, there is more risk on the part of the lender. Lenders will only approve unsecured loans for customers with good or excellent credit. For secured loans, where the car is used as collateral, lenders may be more lenient. As for what kind of interest rate you are eligible for, this all depends on your borrowing power.

What is borrowing power? How do I know how much I can afford to borrow?

A car buyer’s borrowing power is the highest possible amount a lender is prepared to approve for a car loan when they apply. A car buyer’s borrowing power is determined by:

  • Their credit score and credit history,
  • Their level of income, and,
  • Their expenditures each month.

This will give borrowers and lenders an overview of how much they can afford to repay each month or repayment period without going into financial hardship of any kind (lenders will stop well short of approving any amount approaching such a figure.)

You can roughly calculate your car loan borrowing power by figuring out your income from all sources, your expenses, including repayments on loans or credit, as well as rent, utilities, and luxuries (disposable items.) Your number of dependents or children may also be factored into your borrowing power.

Though it isn’t part of your borrowing power, you should also figure out how much your car will cost to run each month. You should be able to meet the repayments as well as the maintenance and running costs.

You can make more precise calculations by knowing the approximate interest rate of a loan and the loan term. Some lenders may also weigh up if you are single or are making a joint application.

Prior to 2018, many lenders used the Household Expenditure Measure (HEM) to figure out an applicant’s borrowing power, which compared a borrower’s situation against others in similar circumstances. These days, lenders will ask you to provide individual evidence of your financial situation through payslips or financial statements.

Having a higher credit score also makes you eligible for better or more competitive interest rates. You should check your credit history before making an application.

What is classified as income?

Income is defined by most banks and lenders as money earned through employment or other sources such as rents or investments.

However, some people may not be employed and still receive income. Retirees may get income from their superannuation or investment accounts. Other types of income could be from government benefits or disability payments through Centrelink. Not all lenders view Centrelink payments as income; some lenders will consider Centrelink payments as income, provided they meet certain car finance eligibility criteria.

Centrelink payments such as Veterans payments, the age pension, carer’s payments, family tax benefits, rent assistance, and those on the National Disability Insurance Scheme (NDIS) may receive regular fixed payments, or income.

Other payment, such as Youth Allowance payments is often not seen as income, as these are temporary or supplemental measures.

Talking to a broker can help you find car loans where lenders consider superannuation or Centrelink payments as income.

How can I be eligible for lower interest rates?

The biggest factor in being eligible for lower or more competitive interest rates is to have good or excellent credit. All credit scores in Australia are calculated between zero and 1200, though some reporting bureaus use zero and 1000. The higher a credit score is, the more likely a lender is prepared to offer you lower interest rates.

Sometimes our credit scores are not reflective of our current financial situation. If you had bad credit in the past, such as a default appearing on your credit history, this can damage your credit score for as long as seven years. Though your credit score may appear low on paper, your borrowing power may be much higher when residential history, employment records, and income is concerned. If you have high income relative to expenditures, low or no outstanding debts, and a stable residential situation, lenders may place you in a lower risk category which means you could be eligible for more competitive car loans; or even unsecured loans. Note that unsecured loans do have higher rates than secured loans; you’ll have to determine whether an unsecured loan is right for you. Speak to a financial adviser before proceeding with any type of major financial decision.

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