How to get a car loan and increase your chances of being approved

Checking your credit score is possibly one of the most overlooked steps in getting any kind of personal financing. It’s a number that most people don’t think about too much.

Your credit score is unique to you, based on your history of borrowing and repaying money. If you pay your bills, loans and credit cards on time, you may have a good credit score. But if you’ve missed or defaulted on repayments in the past, you may have a poor credit score.

Lenders use your credit score as a shortcut to assess the risk that may be involved when lending you money. This makes your credit rating one of the main factors that determines your car loan’s approval chances, as well as the interest rate you may be offered. The higher your credit score, the more likely you may receive car loan approval, and the lower the interest rate you may be offered. Getting car loan approval with bad credit may not be easy, but it is possible with some specialty lenders, or with help from a guarantor.

You can check your credit score for free to get a better idea of how a lender sees you before applying for a car loan or any other credit product. If there are any mistakes in your credit history, you can contact the parties involved to get these corrected. And if your credit history isn’t the best, you could take some time practising good credit behaviours to hopefully improve your credit score over time.

Research is one of the best ways to prepare for a loan application. Using online tools and calculators, you may be able to work out:

• The price range for your next car;
• How much you might be able to borrow, based on your income and expenses;
• How much your potential car repayments could be;
• The loan term you want to repay your car loan, and;
• Any other potential upfront or ongoing costs (e.g. insurance and maintenance).

Before applying, take the time to compare car loans on the market to find one that’s right for you. It’s often a good idea to compare car loans before you even start looking at cars.

Some car loan features to weigh up include:

• Interest rate: Look at both the advertised rate (how much interest you’ll be charged on the loan) and comparison rate (which combines interest with standard fees to give you a better idea of the loan’s overall cost).
• Fees: These may include application fees, monthly fees, early exit fees and more.
• Features: These may include the ability to make extra repayments and pay off the loan early, which could help you save money on total interest charges.
• Loan term: Car loans often run for between one and seven years. A longer loan term means lower monthly repayments, but paying more interest on the car in total, and vice versa.
• Loan type: Car loans are often secured by the value of the vehicle being purchased, which can mean a lower interest rate. Unsecured car loans are also available, which often have fewer restrictions but higher interest rates.
• Lender type: You could consider going to a bank, non-bank lender, peer-to-peer lender, car manufacturer or dealership.

When you apply for a car loan, lenders will ask for a range of documents to help them assess your repayment capacity as part of the approval process.

Different lenders will ask for different documents, but some of the paperwork they’re likely to request includes:

Proof of identity

No lender will approve a loan unless you can prove you are who you say you are. You’ll probably be asked to provide 100 points of identification.

A passport and a driver’s licence will typically get you over the line, as will a passport, Medicare card and utility bill. Check the lender’s requirements before you apply.

Proof of residence

As part of establishing your identity, lenders will want to confirm your address.

This could be done with a utility bill, council notice, tenancy agreement or mortgage statement.

Proof of income

Once a lender has confirmed your identity, they’ll want to make sure you’re earning enough income to repay the loan.

You might be asked for a combination of payslips, bank statements, group certificates and tax returns.

Proof of savings

Repaying a loan isn’t just about how much money you earn – it’s also about how much of that money you spend.

Lenders like to make sure potential customers are capable of saving, so don’t be surprised if they ask for bank statements and/or investment documents.

Proof of liabilities

Lenders will also want to know about your debts, so they can get a complete understanding of your financial position. That means you’ll probably be asked to provide copies of credit card statements, loan agreements and the like.

A lower debt to income (DTI) ratio helps give a lender confidence that you can repay a car loan. If you can pay off any of your outstanding debts and/or reduce the limits on your credit cards before applying for a car loan, this could potentially improve your car loan’s chance approval chances.

Car details

If you plan on applying for a secured car loan, the lender will want to be confident that the value of the car being purchased will be enough to secure the loan in case you default on your repayments.

You may need to provide details of the car you're buying, including its make, model, age, kilometres travelled, and overall condition. These details may be found in the contract of sale and car registration.

Some lenders may set limits on the type or age of cars you can buy, so check the requirements before applying for a car loan. New cars often offer the latest safety features and a clean maintenance history, but they tend to have higher price tags and depreciate rapidly. Used cars are more likely to cost less to buy, but older cars are more likely to need repairs in the future.

Proof of insurance

Some lenders won’t give you a car loan if you don’t have comprehensive insurance, because you might struggle to repay the loan if you were suddenly hit with a damage claim.

As a result, you might be asked to provide insurance documents as part of your car loan application.

While pre-approval is an optional step in the car loan application process, it may be helpful for some people. Pre-approval is when a lender agrees in principle to lend you a sum of money before you purchase a car, while still allowing you or the lender to back out if either of you changes their mind. The lender needs to assess your financial situation before giving this initial green light, so it can be a good indication of whether you’d be approved, though it’s in no way a guarantee.

A pre-approved car loan can give you a clear idea of how much you can really afford. Armed with this knowledge, you can head to a car dealership or approach private sellers with better confidence that you won’t be overstretching your budget.

After gaining pre-approval and making your mind up on the car you want, you’re ready to apply for the real deal. You should make sure the vehicle you’ve chosen is qualified for the car loan you’re applying for. When car shopping, take note of the vehicle's age, kilometres travelled, make and model.

How long it takes for a decision to be made will depend on the lender and whether it’s a straightforward application. Sometimes, the lender may need more information from you, which may drag out the waiting time. The more information you can provide a lender up front, and the more accurate and detailed the documentation you provide, the less likely the lender would need to halt the approval process to check something with you.

If you aren’t certain whether your car loan application may be accepted by a lender, another option to consider could be to get help from a car finance broker. Similarly to mortgage brokers, these experts can help you work out which car loan options may best suit your financial situation and personal goals, and negotiate with lenders on your behalf to help you get the best deal for your needs. They can also help you complete your application, making sure you have all the necessary documentation to maximise your car loan’s approval chances.