There’s no doubt about it. Juggling studies, work and the responsibilities of life can be tough without a car to keep you moving. For many students who can’t afford to purchase a car up front, a car loan is a great solution.
The good news is that online lenders, banks, credit unions and car dealers all have loans available to students.
Tick the box
To qualify for a student car loan, you must meet the following requirements:
Age: You need to be over 18 to apply for a student car loan. Some lenders will limit your loan amount if you are aged between 18 – 21 but this depends on your income and credit score.
Residency: Most lenders will only offer car loans to student applicants that are citizens of Australia or Permanent Residents. However, some lenders will accept temporary visa holders.
Income: As a student, you don’t need to have a very high income to qualify for a car loan. But you’ll need to show that you have stable casual or part-time work bringing in a regular income. Keep in mind, many lenders do not accept Newstart, Austudy or Youth Allowance as sources of income.
Before you start
Take the time to work out how much you can afford to pay each month on top of your current expenses. You can crunch the numbers on this useful calculator on the MoneySmart website. Once you have a particular car loan in mind, make sure you’re aware of all the loan features and hidden costs including:
- The loan amount
- The interest rate
- The repayment period
- Additional fees such as establishment, upfront late payment, account keeping, early exit and monthly administration fees
- The repayment period
Know the score
When you apply for a car loan, you can expect the lender to check your credit history, current debt and income so they feel confident you can repay the loan.
Your credit score is a number that sums up the information on your credit report. It takes into account information like the number of credit applications you’ve made and the amount of money you’ve borrowed. It also notes your history of repaying debts on time. Basically, it tells the lender whether or not you are a trustworthy borrower.
If you have a low credit score, you could be stung with higher interest rates so it may be worth working on improving your score before you buy. You can do this by:
- Paying your rent, mortgage and utility bills on time
- Making credit card repayments on time and paying more than the minimum repayment
- Lowering your credit card limit
- Limiting how many applications you make for credit
All of these things will help your credit score to improve over time, giving you a greater chance of being approved for a car loan and securing a competitive interest rate.
Checking your credit score is a worthwhile exercise. It can help you negotiate better deals or understand why a lender rejected you. If you spot any errors in your credit report, you can fix them for free by contacting the credit reporting agency.
You can get a copy of your credit report and credit score for free every 3 months. Check your credit report for free by contacting one of these credit reporting agencies:
- Equifax: phone 138 332
- illion: phone 132 333
- Experian: phone 1300 783 684
Simply call to get your credit score on the spot or access your report online within a day or two. You could have to wait up to 10 days to get your report by email or mail.
You can also obtain your credit report through government financial guidance site Moneysmart, or financial comparison sites like Canstar.
Having a family member or friend with good financial status and credit history act as a guarantor application could improve your chances of being approved for a student car loan. This means they co-sign the loan and agree to accept responsibility for the repayments if you default for any reason. Your guarantor acts as a type of security, making it less risky for your lender to loan you the funds.
You might even be able to borrow a larger amount and secure a lower interest rate if you have a guarantor on your personal loan, which means you’ll save money over the life of the loan.
But remember, it’s a big responsibility for both of you. If you can’t make repayments down the track, your guarantor will need to foot the bill, which could damage your relationship or impact family dynamics.
Before you take this step, make sure you can afford the monthly repayments in addition to your other bills. Are you sure your income and expenses will remain the same throughout the whole term of the loan? If your circumstances change, could you still afford this additional debt?
When you’re researching student car loans, it pays to look beyond the ‘Big Four’ banks. Online lending platforms, also known as peer-to-peer lenders, often provide a faster approval process and lower interest rates than traditional lenders.
This type of lender, also known as ‘peer-to-peer’ lending or marketplace lending, allows you to seek a loan from a private lender. All P2P lenders set their own loan requirements and terms.
It’s a good idea to check the comparison rates of various lenders to make sure you find the best loan to suit your needs. Comparison rates do the hard maths for you by rolling together the interest rate, upfront fee and service fee into one percentage figure. It gives you a more accurate understanding of the cost of your loan.
Financial comparison sites like Canstar, Ratecity, InfoChoice and Mozo can help you find and compare the best deals on car loans quickly and easily, including loans offered by P2P lenders.
Car dealer finance
Many car dealerships offer their own loans when you buy directly from their car yard. This type of finance is usually very swift to arrange and may include a tempting up-front saving, such as zero interest for the first few months. But make sure you read the fine print. Car dealer finance may come with hidden fees and charges, such as up-front and monthly administration fees, and/or a ‘balloon’ payment. A balloon payment is a large sum paid at the end of your loan in order for you to own the car.
It’s a good idea to calculate whether the total repayments on the loan will end up being higher with the extra fees and balloon payment before committing.
Banks and credit unions
Some banks and credit unions offer car loans specifically for students, while others will simply offer their regular car loan products.
A traditional car loan from a bank or credit union can be secured or unsecured.
Secured car loan: This type of loan is usually secured by the car. This means if you can’t make repayments, the lender can take the car and sell it to recover the cost of the loan. Some lenders will approve a new car loan for cars that are 2 or 3 years old. The higher the value of the car, the lower the interest rate may be on this type of car loan.
Unsecured car loan: An unsecured car loan usually has a higher interest rate than a new car loan or secured car loan. This is because an unsecured car loan does not require an asset to be provided to secure the loan, so it is considered riskier for the lender. The lender assesses your credit score and income to approve the loan.
Fixed or variable interest rate?
When you apply for a car loan, you have the option to choose between a fixed or variable interest rate.
It’s important to weigh up the pros and cons of both loan types so that you can make a decision that’s safest for your financial situation.
Fixed Interest Rate
Simply put, a fixed interest rate never changes, meaning your repayments remain the same for the life of the loan.
- You know exactly how much your repayments are each month.
- You can plan and budget with certainty, knowing your repayments won’t change.
- You can plYou’re protected from future interest rate rises.an and budget with certainty, knowing your repayments won’t change.
- If the market interest rate falls, you pay more interest with a fixed rate.
- Some lenders may insist upon a shorter lending period.
- Fixed rate personal loans may not have a redraw facility.
- If you want to pay back your car loan early, you could be stung with a higher early repayment fee. But remember, Plenti will never charge you fees or penalties for paying your loan back early.
Variable Interest Rate
A variable rate rises and falls with the market interest rate as it responds to current economic conditions. This means you could end up paying more or less for your car loan, depending on the market rate.
- If the market rate drops, you could pay less for your car loan overall.
- Most lenders offer longer repayment terms with a variable interest rate.
- You may have the option to make additional repayments which could save you money over the life of your car loan.
- You may be able to redraw from any additional repayments you have made if you need some extra cash along the way.
- If the market rate rises your repayments increase.
- Interest rate rises are unpredictable and could make it harder to budget and make plans for the future.
Choosing between a fixed or variable interest rate is an important decision that could have a big financial impact down the track. Some people prefer the predictability of a fixed rate personal loan, while others prefer the flexibility of a variable rate.
Things to consider
When calculating how much you can afford to borrow, don’t forget to factor in the cost of actually running and maintaining your car, including stamp duty, registration, car insurance, petrol, regular services and road tolls.