How To Qualify For Car Finance

Put yourself in the driving seat and find out what the lenders look for in our guide to car finance approval.

No obligation. It won't affect your credit score.
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, updated on July 5th, 2023       

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Looking to purchase a car under finance? You’re going to learn how to qualify for car finance with as little fuss as possible. We’ll look at how car loans work, how the lenders look at applications, and how to access fast, low-cost car finance online.

Your credit report, how many applications you make, and how you manage your savings and day-to-day cash all make a difference when it comes to lender decisions:

Check your credit report

Lenders check your credit report every time you apply for finance. Knowing what they’re looking for is priceless if you’re wondering how to qualify for car finance:

  • Lenders look for past defaults – which don’t get wiped from your report for five years
  • They also check for any late payments – which stay on your record for two years
  • Your loan provider will check existing borrowing too – which remains on your report for two years after you pay it off

It’s essential to keep your credit report in good shape. Pay bills on time, and stay on top of credit cards and loans. The healthier your credit situation looks to lenders, the more likely you are to be offered lower interest rates and a better choice of financial products.

Limit your applications

Every time you apply for finance, lenders record that on your report. Too many entries look bad, so don’t shop around by applying. Credit enquiries remain on your report for five years. It’s better to compare finance packages online and narrow lenders down – before you make any moves or an application.

Consider using a deposit or trade-in

Lenders love responsible borrowers with organised finances. While a cash deposit is by no means compulsory, it won’t hurt your application to have one – and it can save you some money too:

  • You can reduce your monthly payments, your loan term, and the lender’s risk with a deposit – or just boost the amount you get to spend on your new car
  • Many Aussies use their old car as a trade-in to keep the cost of borrowing down – but, it’s also a great option if you don’t want the hassle of selling your vehicle privately

When you budget for borrowing, think as the lenders think

Lenders look at your earnings, but they also estimate your expenses too. Different lenders have various methods for assessing borrowers, but looking at HEM is going to be helpful.

The House Expenditure Measure, or HEM, is what most banks use to get an idea of what borrowers can afford, based on estimated expenses. Things like the state where you reside and the number of your dependent children make a difference to your final rating. However, your lifestyle type is what really defines you as a borrower.

Banks use categories labelled as Student, Basic, Moderate and Lavish. The Basic category sets annual expenses at $32,400. Lavish, in comparison, estimates yearly outgoings to be $50,000 – this makes a huge difference when it comes to calculating your borrowing capacity. Let’s look at an example where a borrower earns a $100,000 salary. For the purpose of this exercise, we’ll assume the mortgage lender is prepared to lend six times their annual pre-tax income after expenses:

EarningsCategoryAnnual expensesDisposable incomeBorrowing capacity

Whichever method a loan provider uses, paying attention to your disposable income and spending will increase your chances of getting a yes – and your access to funds. Lenders look at what’s left once the rest of your life has been paid for. It’s not just about how much you bring home.

Getting help is free

Consider using a broker, they know a thing or two about matching finance products with people – and they’ll do the hard work of scanning the whole market for you. They can advise on any aspect of your application, including pointing you at lenders who specialise in car finance. What’s more, brokers get paid by loan providers so using one won’t cost you a thing.

Why choose Savvy?

Helpful guide on how to qualify for car finance

Buying second-hand with finance – what you need to know

The main advantage of second-hand cars is that they’re far cheaper to buy. It’s possible to spend and borrow less and still get a roadworthy, usable vehicle – or you can spend more and get a higher spec car for the price of a basic brand new one. However, repair bills for older cars can mount up over time, so if you’re buying a second-hand car with finance, you might want to get it checked over mechanically by a professional first.

If you buy a vehicle more than five years old, it probably won’t come with a warranty. Add that to the likelihood it will require more attention and you could end up out of pocket.

It’s worth noting that the car you choose can also affect the cost of your borrowing. Lenders base decisions on the age of the vehicle at the end of your repayment period.

For example, if you want to buy a five-year-old car on a seven-year loan, they’ll base their decision on it being twelve years old when your agreement ends. Each lender’s requirements are different, but get based on risk. That doesn’t just apply to you as a borrower – older cars are riskier for loan providers too. That means interest rates get higher as a result.

Using finance to buy a brand new car – what to consider

There are pros and cons to buying both new and used cars. Purchasing any vehicle costs more than just the sticker price. Regular maintenance and servicing, fuel, insurance, and even breakdowns can cost a packet too.

New cars come with a warranty (Many manufacturers offer unlimited-kilometre warranties that last between five and seven years).

Many new car manufacturers provide fixed servicing costs – so, it’s easy to budget for maintenance. New cars tend to be more fuel-efficient and eco-friendly than older ones – plus, there are some fantastic hybrid and electric options out there. In states that require regular roadworthy checks, new cars are exempt. In New South Wales, you won’t need a certificate until the vehicle is five years old. In the Nothern Territory, you’ll only need a test when the car gets to five and ten years old, and then annually for its lifetime.

Probably the most significant disadvantage of new cars is that they depreciate quite significantly, and relatively quickly. Vehicles vary, but as a guide, think about the car holding 70% of new car value after three years, and just 50% after five

How to qualify for car finance you can afford – calculating repayments

Online loans provide an accessible, more informative way to shop for car finance. It’s quick and simple to check out the benefits of each product using your smartphone, tablet, or laptop. You can view products all in one place and compare loans easily. Not only that, but buying online makes budgeting a breeze. Savvy’s online repayment calculator makes working out costs as easy as 1-2-3:

Simply adjust the repayment period, borrowing amount, and interest rate to match the loan you’re considering. Decide if you’re using a deposit or trade-in and enter the amount if applicable.
Then, just set the repayment frequency to match your pay cycle or preference. Choose from weekly, fortnightly, or monthly payments.
View the total amount to repay, overall interest payable, and your regular repayment amount – instantly. With a better idea of the costs involved, it’s easy to figure out precisely what you can afford.

What to look for when paying off your car loan early?

Secured loans are available with repayment terms that run between one and seven years. With a longer-term finance agreement, your plans might change before you’ve repaid in full. However, all secured car loans have early termination fees.

An early repayment fee is either a set figure or an amortised amount, depending on your lender. Amortised basically means the fee gets lower along with your balance – so you’ll pay more money the earlier you decide to end the agreement

Your lender may charge an Administration Fee to cover the costs of closing your loan account. Admin fees range between $50 and $150. Some lenders charge a Discharge Fee for removing government registration of their security interest in the vehicle

With that being said there are several lenders in the market with no discharge costs at all.

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