How do I finance my car?

It’s time for a new car and you’ve decided, by choice or necessity, to finance it rather than dig into your savings.

Whether the car you choose is brand-new, a demo or ‘new to you’, here are some basic steps and considerations that should help make your car financing experience a little easier.

First things first – are you eligible for a car loan?… This is a basic consideration, but it still needs to be ticked off.

Your eligibility for a car loan will depend on a number of factors including the value and age of the car itself, the lender you choose and your financial situation.

Our list of the type of documentation you’ll need is below, but suffice to say you’ll need to demonstrate the ability to repay the loan.

In assessing your situation and whether you are likely to qualify for a loan, you should also be aware of any other financial commitments you have and whether anything is likely to change with them or your ability to repay any loan in the future.

One of the factors that will affect your ability to get a car loan, and the interest rate or fees you’re likely to pay, is your credit rating.

There are a number of online providers via which you can check your credit rating. Whether you choose to do so or not, note that having a bad credit rating may make it harder to get an attractive car loan offer.

Some car finance providers, including dealer and manufacturer-linked financiers, specialise in providing buyers who have a poor credit rating with access to finance. This could therefore affect your choice of loan type and provider.

It’s important to pick a type of finance that suits you. Different types of finance products suit different types of buyers. This is especially the case if you are buying a new car for your business but will also differ significantly for private buyers based on the cost of your new vehicle and other factors (eg. how much deposit you have available).

We have outlined the common types of car loans and car finance.

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Once you have a vehicle price range in mind and have determined other factors such as the amount of deposit you wish to pay (or the approximate value of your trade-in), it’s a good idea to sanity check your expected repayments.

You can use an online finance calculator to do this. Although the repayment amounts such calculators provide are only approximate and subject to assumptions, they will give you an opportunity to see how your proposed new vehicle fits into your existing budget.

The advertised price for some vehicles can exclude government charges (eg. stamp duty), so make sure you understand all additional costs that apply when purchasing the vehicle. Additionally, unless you are financing via a novated lease or other similar finance product that includes all running costs, remember to include other costs like registration, insurance, servicing and tyres in your overall budgeting calculations.

Many online finance calculators will allow you to project different loan periods and interest rates. If you choose the shortest loan term you can afford, you can minimise the total amount of interest paid on your car.

Expert opinion on the maximum proportion of your annual income you should spend on buying and running your car is often between 10-35%.

The days of rocking up to a finance provider, filling in one form and getting (almost) instant money are gone. And if you do go down the route of what are generally termed ‘low doc’ (low documentation) loans, the chances are you’ll be paying extra via higher establishment fees and/or higher interest rates.

Responsible and reputable lenders will expect you to provide a decent level of documentation to support your loan application.

Basic car loan applications will usually require you to supply:

• Pay slips and employer details
• Identity documents – driver’s license, passport, etc
• Address details and proof of outgoings – rent, cost of living, etc
• Documentation showing any savings and other assets – via bank statements, shares, etc
• Documentation showing any existing debts – home loan, credit card limits, etc

It makes sense to have all of this information up to date and on hand before you start the loan application process.

Car buyers are researching car loans and car finance products earlier than ever in the car buying cycle. In fact, by the time most car buyers get serious about narrowing down their choice of new or used car, the chances are they already have their finance arranged and at the least conditionally pre-approved.

There are good reasons for getting your car loan or lease pre-approved. Perhaps the number one is that it takes the finance aspect of negotiating on a new car out of the equation – and this applies buying privately or via a dealer.

This means on new cars and demos, you can let the dealer know early in the negotiation process and focus on the bottom-line price.

Most responsible car loan and car finance providers will happily work through a pre-approval process.

If you are buying new or demo, or a used car from a dealership, it can pay to consider the finance options presented by the dealer or manufacturer.

In the case of new and demo vehicles, often the car finance is linked to a manufacturer’s own finance company. There can be special offers linked to particular vehicles or promotions which can be attractive in terms of value for money.

In almost all of these cases, the dealer is acting as a reseller of the finance and is making a margin on the finance. However, due to increased consumer regulation and the competitive nature of car retailing, that doesn’t always mean the buyer ends up paying more. The dealer’s margin may in fact be paid by the manufacturer.

It is also in the dealer’s interest to try and get you a finance deal you are happy with – even if you have a less-than-perfect credit history.

The flipside is you will have to fully understand the offer, or take the riskier approach of trusting the dealer that the finance deal is the best for you (and not the one that earns the dealer the highest margin). With that convenience comes the chance you will pay a little more…

Check out the carsales car loan and car finance landing page for more information and helpful hints related to new and used car loans and car finance.

Related: Car finance - Everything you need to know

DISCLAIMER: This car finance information is general in nature and should not be relied upon as legal advice. Each of these options may be subject to exclusions and limitations and you should always read the terms of any finance deal before agreeing. carsales.com Limited does not warrant the accuracy, timeliness or completeness of any representations made in the document or that the material is suitable for any purpose. Opinions expressed within carsales’ editorial material are those of the writer and not necessarily of carsales.