How Much Can I Borrow For a Car Loan?

Determine how much can you borrow for your car loan using our comprehensive guide.
No obligation. It won't affect your credit score.
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, updated on June 30th, 2023       

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How Much Can I Borrow For a Car Loan?

Determining how much you can borrow for a car loan is based on how much you earn, how much you spend each month, and your credit habits. This calculation is used to figure out your borrowing power – how much you can afford to pay back to a lender each month or repayment period.

How do I figure out my borrowing power?

According to the Australian Bureau of Statistics, by the end of 2018 Australians had financed vehicles to the tune of $1.23 billion. ASIC MoneySmart says the average car cost in Australia is $27,994 with the average loan amount totalling $18,049.

Your borrowing power is determined by looking at your income and expenses and seeing what is left over to service (pay back) a loan.

Let’s take this as an example: If you earn $100,000 a year and spend about 60% on essentials like rent/mortgage, bills, groceries, etc. this means you have $40,000 in disposable income. You may use about 20% of that on disposable purchases like nights out, movies, sports days, holidays, etc. This leaves you with $20,000 left over.

$20,000 in disposable income could demonstrate you can comfortably pay back a $50,000 loan over five years without running into any financial difficulty (provided you don’t lose your job, fall ill, etc.)

Using this example, if you take out a five-year loan for $50,000 with a $4,000 deposit, your borrowing power ranges between $868-$1,047 per month. Owing more each month might put you in financial trouble, which a lender is bound by law not to do.

A lender will not simply lend out $300,000 for a luxury vehicle to someone who earns $50,000 a year, even if their credit is spotless – this would put the borrower at risk.

What is creditworthiness? Is it tied to my credit score?

Yes – creditworthiness is expressed as a credit score by the major credit reporting agencies. ASIC MoneySmart says a credit score is “a number based on an analysis of your credit file, at a particular point in time, that helps a lender determine your creditworthiness.”

Your credit score is an aggregate or expression of how risky you might be as a borrower. Your credit history will list which lenders you owe money to and how much, how much credit you have borrowed, how many times you’ve applied for credit, unpaid debts or maxed out credit, and any court orders or agreements related to unpaid debts or bankruptcy.

Most credit agencies, the bodies that prepare your credit reports, give you a score between 1200 and 0. (Some provide a number between 1000 and 0.) If you have a high score, you are deemed more “credit worthy.” If you have a low score, you are more of a risk and may be in the “bad credit” or “below average” category. For example, applying for credit in many places and being rejected shows lenders you may be desperate for credit and could have trouble paying them back. This all drops your credit score.

This can hinder your attempts for credit approval and may mean you have to prove your creditworthiness in other ways. Even so, lenders may only give you a loan with a higher interest rate as this is “insurance” against not being paid back (known as defaulting.)

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How does a lender figure out my borrowing power?​

A lender will conduct a “soft” credit check – which does not go on your credit file – to assess whether you are eligible for a car loan. This is part of responsible lending practices which is there to protect consumers.

Using this publicly available information, a lender can determine whether you are a risky borrower or not. Some lenders may offer you a preliminary interest rate so you can do your first set of repayment calculations. It is a check to verify you are who you say you are. This is also known as loan “pre-approval” or “approval in principal.”

Before making a “hard” or formal credit inquiry with a credit reporting agency, you may volunteer payslips, employment statements, bills in your name that you have paid, and other financial statements to show you can afford to pay back a loan.

The formal credit inquiry confirms the lenders’ assessment of a borrowers’ creditworthiness. Depending on how good or bad the history is, they may offer you a lower (or higher) interest rate.

Looking at repayments over interest rates

Low interest rates aren’t the be all and end all of saving money on a car loan. A lender can advertise the lowest of the low interest rates, but it doesn’t mean you’ll be paying less over time in repayments. Some interest rates may be low but when expressed as a comparison rate, which includes most fees in the percentage, the costs are much higher.

Looking at your repayments instead of looking at interest rates will give you a clearer picture of how much the loan “costs” and how much you can budget for. This is a fixed cost and can be factored into how much you can afford to borrow, once registration, insurance, fuel costs, and other on road costs are considered.

Using a car loan calculator can give you a general idea of how much you can expect to pay each period. All you need to know is the comparison rate you’re likely to pay and how much you want to borrow. The calculator can be useful in figuring out your own borrowing power.

What you’ll need to prepare for a car loan application?

Check your credit history

Checking your credit history helps you understand your borrowing power before a lender makes any sort of judgment. If your credit history has mistakes or defaults that aren’t your fault, you can use this opportunity to correct them. It could save you thousands in interest.

Payslips and employment information

Having payslips to confirm your income is always a plus when you apply for a car loan. This proves your creditworthiness in an additional way apart from just checking your credit score.

Financial statements

If you have supplementary income or can prove you are responsible with savings, this can further aid your car loan application. If you have more disposable income than what your initial assessment shows, it could improve what interest rates are available and/or your borrowing power.

Paid bills or proof of residency

Showing lenders you are responsible with bills and residency (e.g. not moving often) can also tip the scales in your favour.

Your car loan affordability questions answered

What is my creditworthiness? How do I find out?

Your creditworthiness is determined by the likelihood of you being able to pay back a loan on time and in full. You can make a partial analysis of your creditworthiness by looking at your income and expenditures as well as your credit score.

How much can I afford to borrow for a car loan?

You will need to look at your disposable income and see how much you can borrow based on that figure. As a shortcut, you can look at a car loan calculator, which shows you approximate repayments based on what you intend to borrow.

My repayment calculator says I can afford to pay X amount per week. Is this my borrowing power?

Yes, this is what is known as your borrowing power. How much you can afford to pay back per week, fortnight, or month will determine how much you are able to borrow. Responsible lenders will not approve loans a customer has little chance of paying back.

As a sole trader or businessperson, how much can I borrow for a car loan?

A businessperson who is using a car for business purposes 50% of the time may be able to apply for a chattel mortgage. A chattel mortgage allows a business borrower to borrow more than the value of the car for cash flow purposes. Talk to your accountant or financial advisor for more information.

What is a credit score?

A credit score is a number that shows lenders and those who approve credit your creditworthiness. This score is out of 1200 (or 1000.) A higher score means you are a lower risk; a lower score means the opposite. Higher scores may be eligible for lower interest rates and other select loan products.

How do I check my credit score or credit history?

Australians can check their credit score or history for free by filling out an application at one of the three major credit reporting bureaus. More information on these bureaus are available at ASIC MoneySmart.

Why does putting down a deposit effect my car loan interest rate?

Putting down a deposit through cash or trade-in can affect your car loan interest rate due to the decreased risk on the part of a lender. The less risky a transaction is for a lender, the more willing the lender can “reward” a borrower for taking on the risk themselves by lowering the interest rate available to them.

What is a comparison rate?

A comparison rate is a car loan interest rate plus all major fees and charges associated with the loan expressed as a percentage per annum (per year.) This does not cover fees such as early exit fees or refinancing fees, if applicable.

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