If you are in the market for a car, you should know that it is not always an enjoyable task. Buying your first car is a rite of passage of sorts. It is a noteworthy moment you will remember for decades to come. Once you purchase your fifth or fiftieth vehicle, concerns about the nuts and bolts of the process may replace the excitement.
Aside from unease about the car you are buying, your ability to get financing (and at a reasonable interest rate) is a top stressor during the car buying process. Loans, in general, have a bit of mystery surrounding them, which adds to the tension when you are trying to make your choice.
At Loans Unlimited, we specialise in getting our clients the best rates possible and work hard on your behalf. Not everyone knows what is involved in the loan process, and it is time for us to demystify the factors that influence your eligibility for a loan and the interest rates.
Factors that Determine Loan Eligibility
1. Residency or Citizenship
Proof of your citizenship or permanent residency in Australia is required by law. There are several acceptable ways to satisfy this requirement. These include:
- Bank statements
- Credit card statements
- Lease agreement
- Medicare card
- Mortgage statements
- Property tax bills
- Utility bills
2. Proof of Age and Identity
You must be at least 18 years old to apply for a loan in Australia. It should go without saying that you need to be able to prove your identity and are the person you are. There are a few ways to confirm your age and identity for loan purposes. These include:
- Driver’s License
- Proof of Age Card
3. Proof of Your Income
No lender wants to risk a financial loss for any reason. Before granting a loan, all lenders will need to know how you will repay it by seeing a confirmation of the money you make. There are several ways you can confirm your income.
- Bank Statements
- Pay Stubs
- Tax Returns
- Youth Allowance
4. Show Proof of Your Assets
Demonstrating your income-generating holdings will go a long way in reassuring a lender that you can pay back the loan and that you have access to collateral. An asset is any significant holding that has value and that you can exchange for cash. Some examples of assets include:
Your Type of Loan
Your next step in securing the loan is deciding which kind of loan you prefer. Your choices are fixed and variable-rate loans. There are pros and cons to both types. However, as far as car loans are concerned, here are our top suggestions.
- Use a fixed-rate loan if you are paying for a new car purchase
- Use a fixed-rate loan if you are buying a car that you intend to keep until the maturity of the loan
- Use a variable-rate loan if you are purchasing an old or second-hand car
Your Interest Rate
After deciding on a car, determining whether you are eligible to get a loan, and deciding on a fixed or variable rate, you still need to finalise all the details of your purchase, including your interest rate.
You may be surprised to learn that someone could be in the process of purchasing the same model car with the same financing from the same financial institution as you are and end up with a better rate. As unfair as this may sound, there is rational thought behind the difference in rate. Some factors that influence the interest rate you are offered include:
- Your Credit Score and Credit History – Lenders look at how you have handled money in the past as a way to predict how responsible you will be with money in the future. It is not possible to over-emphasise how vital your history with credit is to your future financial endeavours. Often, young adults make poor choices with their first credit cards. Unfortunately, lenders are not swayed by excuses like, “I didn’t know that is how things worked.” While you cannot undo the past, take steps now to help your future financial situation.
- Carefully consider big purchases for six months to a year before you want to buy a car. Lenders will examine how much you owe to other debtors. If your outstanding debt is too great, you will receive offers with higher rates for lower amounts of money.
- Build Good Credit- Your decisions now can help bump up your credit score in the future. Pay all of your bills on time. This shows you are responsible. If you owe money to several sources, put extra money towards the lowest bill. Once that debt is paid in full, use the money you were paying to pay down another.
- The Size of Your Downpayment – Because your downpayment reduces the amount of money needed to pay off the vehicle, you will need to borrow less from your lender. Since you are borrowing less, the terms of your loan can be more favourable. Additionally, with a downpayment of any size, you will end up paying less interest over the life of the loan.
- The Length of the Loan – A longer term will not save you money, even if you are offered a slightly lower interest rate. Stretching the payments may look good on paper right now. However, you will pay significantly more over the life of the loan by extending the loan.
- Your Income – If a lender sees you make more than enough to pay back the loan, they can feel confident that you are a safety risk. Often lenders offer better interest rates to this category of buyer. This also speaks to the type of car you want to buy. If you can comfortably pay for a mid-size family car but choose a luxury sports car you may struggle to afford, the lender will likely not offer any breaks on the interest.
- Speak to a Lending Expert – Many people make the mistake of thinking they must head to one of the big banks for a car loan. Doing this can potentially cost you a significant amount of money in interest over the life of the loan. By consulting with a loan specialist, such as Loans Unlimited, you can choose a lender who can offer you the best interest rate.
Buying a car does not need to be an exercise in frustration. Plan to ensure your credit is good, get your documents in order, and save as much as possible towards your down payment. You can also find the best loan for you by contacting Loans Unlimited. Our expert associates have over 25 years worth of experience in the industry. We have helped others in your position and can also help you.