Buying a new or used car is among the biggest and most important investments many Australians make in their lifetime. However, with the average price of a new car ranging between $25,000 and $35,000, paying upfront isn’t feasible for everyone. This means that most car buyers have to take out a car loan.
Unfortunately, applying for a loan isn’t always a walk in the park. You have to do your homework on car financing so you can prepare your application accordingly and score the best deal possible.
In this post, we’ll explain some of the most important car financing terms and how to apply for a car loan.
Key Car Loan Terms You Should Know About
Before you head to a dealership or auto lender, familiarise yourself with the following car loan terms you’re likely to come across during the process:
Down Payment
This is the upfront payment you make which gives you a percentage of the total equity on the vehicle you purchased. This amount is usually 15% to 20%; however, some applicants can opt to pay more to lower their loan term and overall cost.
Annual Percentage Rate (APR)
This term refers to the total amount car loan applicants pay for a car loan, including fees and interest. This amount is presented as a yearly percentage.
Monthly Installment/Payment
This term refers to the fixed payments you’ll owe the lender every month until you’ve fully repaid the amount you borrowed plus interest.
Principal
This term refers to your car loan amount minus all other costs, such as application fees, interest, and late payment penalties.
Credit Score
Most lenders rely on your credit score to determine eligibility. In Australia, your credit score can be between 0 and 1,000 or 1,200. Anything between 622 and 725 is generally considered a ‘good’ score, whereas ‘excellent’ scores usually fall between 833 and 1200. Your score can be used to determine your APR, and therefore, the overall cost of your vehicle.
How to Apply for a Car Loan
1. Determine Your Eligibility
The first thing you need to do before applying for a car loan is to determine your eligibility. This depends on several factors, such as the lender, your credit score and history, financial stability in terms of assets and liabilities, and the cost of the car you’re planning to purchase. If you have a sub-par credit score, you can boost your approval chances by opting for a used or modest car, putting down a bigger down payment, clearing previous debts, and even trading in your old car.
2. Assemble Your Documents
To speed up the application process, you should prepare all your documents, such as your citizenship information, driver’s license, and credit report. Most lenders will also require you to present proof of income, including recent bank statements and payslips, to determine your ability to pay back the loan.
3. Secure Your Loan
Once your documents are ready, it’s time to shop around for the best deals. You can start your research online by comparing different lending options such as banks or financial institutions. Many dealerships also offer financing options so you can get an all-in-one solution. Generally, lenders check your credit score and current financial situation, to determine eligibility and set the loan terms.
4. Visit Dealerships Near You
Once you’ve secured your car loan, you can head to a dealership nearby to look at different options according to your needs and budget. Make sure to consider your family lifestyle and driving habits to pick the right vehicle type according to size, performance, and amenities. Once you have narrowed down your options, take them for a spin on the highway to see how they perform. Once you return, negotiate on price, especially if you’re buying used, and close the deal. The dealership’s finance department will take care of all the paperwork and contracts relating to your purchase. Make sure you review them thoroughly and understand the terms and conditions before signing.
Final Thoughts
Unless you live in an area where public transportation is accessible and reliable, having a vehicle available at your disposal is pretty important, especially for emergencies. Car ownership emboldens your self-worth, provides shelter on wheels, and an independent means of transport to get you to and from your job, errands, and social activities. Having said that, it’s still a huge expense whether you’re buying new or used, so take your time to shop around and look for the best auto lenders near you.
