If you’re a young student juggling studies and part-time work, or just beginning your first full-time job, chances are you have limited or no credit history. We get it – we all have to start somewhere!
Applying for a car loan without a credit score can be a little tricky. Lenders may view you as a ‘risky’ borrower because there’s no report card available that evaluates how well (or badly) you’ve handled your debts and repayments in the past.
Your credit score takes into account information like the number of credit applications you’ve made and the amount of money you’ve borrowed in the past. It also notes your history of repaying debts on time, including bills such as mobile phone plans.
But don’t lose heart. Follow this guide and you’ll soon be on the road to buying your very own sweet ride, even without a credit history.
Will I be approved?
If you can show that you have the means to make regular repayments on your car loan without going into financial difficulty, you’ll have a better chance of being approved for a car loan. Here are 5 ways to prove you’re a trustworthy borrower:
1. Have a secure job with a regular income (it doesn’t need to be full-time).
2. Make sure your income is high enough to easily meet the repayments for the loan you want.
3. Show that you save money from your income each month.
4. Make sure there’s no history of late payments on your bills (this includes Afterpay).
5. Save for a deposit in a high-interest savings account.
Proof of life
Before agreeing to loan you the funds for your dream car, the lender will want to be sure you have a stable home and job. Basically, they want to know you’re not a flight risk. Makes sense, right?
Gather together the paperwork you need to show the following:
- 100 points of ID. For example, your driver’s license, passport, Medicare card, etc.
- Proof of residence, such as council rates or a utility bill, etc.
- Proof of income, such as recent payslips, current bank statements and a letter from your employer stating your employment details.
- Assets, including property or other vehicles that you own.
- Liabilities, including any other debts or loans in your name, such as credit cards.
- Contact details for people who can authenticate these details, such as your employer, landlord or accountant.
Build your credit history
There’s no doubt about it, having a positive credit report makes it much easier to get approved for a car loan. The good news is it’s easy to build your credit history and you don’t need to take out a credit card to do it.
Simply by paying your bills on time, such as mobile phone and electricity, you will start to build a positive financial report. Think about setting up direct debit payments for these bills so that you always pay on time.
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 car loan if you have no credit score yourself. 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.
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
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 offer, such as zero interest for the first few months.
But beware 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. You probably have a long history with your bank through your savings accounts, which might help if you have no credit history.
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’re protected from future interest rate rises.
You know exactly how much your repayments are each month.
You can plan and budget with certainty, knowing your repayments won’t change.
You’re protected from future interest rate rises.
- 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.