Ah, to have a car you can drive around!
This could mean no more dealing with uncomfortable commutes, train and bus delays, and expensive Uber fares. Being able to drive yourself also increases flexibility for internships, part-time work, or simply exploring new places with friends during school breaks or weekends.
However, as a student, securing financing for that set of wheels comes with its own set of hurdles. Lenders typically look at credit history and income when approving a loan application - key requirements you potentially lack. Yet, these obstacles can be managed with the right approach and knowledge of the options available.
Eligibility Requirements for Student Car Loans in Australia
Lenders' standard eligibility requirements for car loan applicants also apply to would-be student borrowers. Meeting these criteria is the first step to getting into your car.
You must be aged 18 or older
You must be at least 18 years old to throw your hat into the application pool. You will need to provide a form of identification (i.e. driver's licence, passport, or birth certificate) as proof.
While you may have access to financing even before you hit your 20s, some lenders may impose maximum loan amounts if you're aged 21 and below. For instance, some may cap the loan at $20,000 if you fall below the age threshold and it's your first time to lend. Note that this limit isn't fixed and can vary based on your overall financial situation.
You must be an Australian citizen or a permanent resident
Most lenders require applicants to be Australian citizens or permanent residents to be eligible for a student car loan. Applicants with stable residency status are typically seen as lower-risk borrowers, and therefore more likely to qualify.
Some lenders may be willing to consider those on temporary visas, depending on the type of visa and the time remaining before it expires. This policy ensures that lenders can reasonably expect repayment within the borrower's stay in the country.
Can a student visa holder apply for a car loan in Australia?
Lenders generally do not accept applicants with student visas because they are considered higher risk due to the temporary nature of their stay.
You must have a stable income
Demonstrating a stable income is crucial. So if you're a student solely relying on allowance from mum and dad, you may have to delay your plan to apply for a car loan.
Ideally, you must have steady employment, whether full-time, part-time, or casual. Lenders may approve car loans for student applicants working at least a month in a part-time or full-time role or three months in a casual job.
Income solely from government benefits like Austudy or Youth Allowance may not be accepted by lenders.
You must have a good credit score
If you're applying for a loan, may it be a car loan or any other lending product, note that a positive credit score is a crucial factor that lenders consider when evaluating applications.
See Also: What Does My Credit Score Mean?
Your credit score reflects the overall assessment of your financial history, including how you managed debts and bills over the years. Lenders are more inclined to approve a loan application if the applicant has a strong credit history as it indicates they have a track record of repaying debts on time and responsibly managing their finances.
Types of Car Loans Available to Students
Secured car loan
A secured car loan is available for the purpose of buying a car - or any other motor vehicle, depending on the lender's terms - that will also serve as the collateral. This means that if you fail to repay the loan, the lender can repossess the vehicle.
It typically comes with lower interest rates compared to unsecured loans due to reduced risk for the lenders. This is good for students looking for more affordable interest rates and can commit to repaying on time until the loan is paid off.
However, there are typically restrictions on the vehicle you purchase, and many lenders limit their best rates to new cars. This means if you're just after a cheap runabout you may not be eligible.
Unsecured car loan
Unsecured car loans are typically accessible through personal loans. It doesn't require collateral and is more flexible in terms of what they can finance (i.e. type of vehicle or age) and from where can the vehicle be acquired (bought privately instead of from a car dealership). However, its flexible and high-risk nature is offset by higher interest rates imposed by lenders.
An unsecured loan is suitable for students looking for flexibility in their vehicle choice or want to use the funds for additional expenses like car registration and insurance. Be wary though that you will be effectively servicing a more expensive car loan than what you would have if it were secured.
Car dealer financing
If you're buying from a car dealership, you may be able to access the financing they offer, often in partnership with a lender, provided that you meet their eligibility requirements. In some cases, this may include special promotions such as zero or low interest rates during the first few months.
Dealer financing is available and can be quickly arranged at the point of purchase. Make sure, however, to read the terms carefully as dealers may add in fees. Note as well of additional requirements such as paying an initial deposit or a large lump sum at the end of the term, also known as balloon payment.
See Also: Car Loan vs Dealer Financing
How to Apply for a Car Loan as a Student
Find out how much you can afford
The first and most crucial step when applying for a car loan is assessing your budget and financial situation. Calculate your monthly income and expenses to determine the loan repayment amount you can realistically squeeze into your budget. Use a car loan repayment calculator to work out how much your repayments will be.
Further, make sure to factor in not only the regular repayments but also associated costs like insurance, petrol, and maintenance.
Did you know?
The Australian Automobile Association (AAA) estimates (2023) that the weekly upfront costs of owning a car are a little over $263 if you live in capital cities and $254 in regional areas. These include loan repayments, registration, and insurance. Running costs like fuel, servicing, and tyres add around $137-$138 per week.
Compare lenders and loan options
Research and compare lenders that offer rates and terms favourable to you as a student borrower. Look for lenders that specialise in student car loans or those willing to offer flexible or lenient conditions. A comparison site would be handy in evaluating interest rates, loan terms, and fees.
Prepare all necessary documents
Gather all required documents you need to submit or present to the lender.
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Proof of identity: Passport, driver's licence, or other government-issued ID
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Proof of income: Recent payslips, tax returns, bank statements
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Proof of residence: Utility bills, rental agreements
Complete the application online or in person, and make sure to provide accurate details and supporting documents. Applications with complete details and documents may be processed much faster than those with missing information.
Review the loan terms and conditions
Once approved, carefully review the loan terms and conditions the lender will present to you. Remember that a car loan is a commitment you have to fulfil for several years, so make sure you understand everything it entails before signing.
Use the funds to purchase your car. If you are buying from a car dealer, the lender may deposit the funds directly to them.
Tips to Increase Your Chances of Approval
Applying for a car loan as a student can feel like drawing the short end of the stick, especially since you need to meet criteria that you might not fully satisfy or lack altogether. However, taking strategic steps can improve your chances of getting the financing you need.
Build a good credit history
Understandably, students or young adults who haven't taken out many loans may have lower credit scores. What you can do is show responsible behaviour with your existing financial commitments, this includes paying your bills on time, managing smaller credit lines, and refraining from applying for loans or credit cards too often.
Maintaining a good credit history, even if it's short, helps establish credibility with lenders and can improve your chances of getting approved for a car loan.
Save up for a deposit
Having some money ready to put down on a car can make your application more appealing as it lowers the risk for the lender and demonstrates that you are financially prepared and committed. Saving up for a deposit - ideally at least 10% to 20% of the car's purchase price - may also allow you to access more favourable rates.
Use a guarantor
If you have limited credit history or a lower income, using a guarantor can significantly increase your approval chances. A guarantor - usually a parent or close relative - co-signs the loan, agreeing to take on the legal and financial responsibility if you cannot meet repayments. This lowers the risk for the lenders and could help you qualify for a car loan with better terms.
I'm Declined for a Car Loan Because I'm a Student: Now What?
Not securing a traditional car loan doesn't mean you're out of options. Here are some alternatives you can consider if you really need to get your hands behind the wheel.
Leasing options
Leasing options involve an agreement where you pay to use a car for a fixed period, usually from two to five years, without owning it. During the lease, you make monthly payments that cover the vehicle's depreciation and the cost of use. After the lease term, you must return the car or, in some cases, may have the option to purchase it at residual value.
Car subscription services
Car subscription services allow you to pay a monthly fee for the use of a car without the long-term commitment of a loan or lease. This monthly fee typically includes insurance, registration, maintenance, and roadside assistance, making it an all-inclusive option.
Buy a cheaper car
Lenders' car loan products typically require a minimum of $10,000 to $20,000 borrowed. This can be a significant undertaking for a student with little to no reliable income.
In this case, it could be wise to shop for a cheaper runabout that won't break the bank. If you have the cash to pay for it and the upfront costs such as rego, then great, but if not, you could opt for a smaller, unsecured loan and try to pay it off as soon as possible to avoid the higher interest costs.
An earlier version of this article was written by Jason Bryce
Photo by Freepik
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