Before you apply for a car loan, understand how car loan interest rates work, which factors determine your borrowing power and what to consider when choosing a car loan.

Interest rate is the percentage of interest you will pay on top of the principal amount of your loan. The principal is the vehicle purchase price. Choose between fixed-rate or variable rate loans to finance your car, motorbike, boat, or caravan.

A fixed-rate motor vehicle loan means the interest rate on your loan remains constant throughout the loan term. The interest rate is 'fixed' at the time you take out the loan, so your regular repayments won't change.

Fixed rates can offer predictability and stability, by shielding you from interest rate fluctuations. This makes it easier to budget for your repayments and ongoing costs. They may, however, also come with slightly higher initial interest rates.

A variable rate motor vehicle loan means your interest rate fluctuates throughout the loan term. This means that your monthly repayment amount may go up or down based on the prevailing interest rates. A variable rate loan can be appealing if you're comfortable with market fluctuations and open to lower initial costs.

Determining your borrowing power

The amount of money you can borrow will depend on a number of factors, and can vary loan to loan and lender to lender. To decide whether you are able to pay back the loan, a lender will examine your situation including:

  • Credit score and loan history – Lenders use your credit score and loan history to decide your creditworthiness. Lenders usually prefer a credit score of at least 600-620 for a car loan. A better credit score may help you qualify for better interest rates. You can check your credit score before you apply for a loan.
  • Deposit amount – You don't need a deposit to get a car loan. However, to reduce the amount you need to borrow or reduce your regular repayments, you may choose to put down a car loan deposit.
  • Debt to income ratio – Debt to income (DTI) ratio is how much debt you have in total, compared to your income. Add together all of your debts including mortgage, credit cards, other vehicles loans. Generally, lenders prefer all of your debts (including this car loan you are applying for) are not more than 30-43% of your gross income.
  • Type of vehicle – The lender will look at the type of vehicle, including the vehicle's make, model and age. In general, lenders view newer cars to be less risky. If the car you want to buy is older than 10 years, talk to a finance broker about your options.
  • Vehicle use (business vs. private) – Consider a business car loan if you have an ABN and will use the vehicle for business use at least 50% of the time. With a business car loan you can access tax benefits.
Use our online calculators to estimate your borrowing power. 

Calculators

Factors to consider when choosing a car loan

Get an idea of how much you can borrow by looking at loans before you shop for your new (or used) car. Have a clear idea of your budget so you can be confident you can manage your repayments and ongoing costs.

  • Interest rate – After the principal amount of the loan (your car's purchase price), interest is the biggest cost of a car loan. You can reduce your loan repayments, including interest, by putting down a deposit if your lender allows it.
  • Length of the loan – Different lenders offer different car loan with different loan periods. A shorter loan term (1-3 years) can mean higher repayments but less interest paid overall. A longer loan term (4-7 years) can offer you lower repayments but more interest paid overall.
  • Monthly repayments – Most car loans demand monthly repayments. Some lenders will let you make weekly or fortnightly repayments, which will pay your loan off faster and save

  • Hidden fees – Car loans will often include fees. The costs for the loan vary depending on the lender and type of loan. They may include fees for applying, ongoing fees, penalties for early repayment, or penalties for missed payments. If you use a broker, they will lay out all fees upfront including their own.

  • Type of loan (fixed vs. variable) – You need to weigh up the pros and cons of each fixed rate loans and variable rate loans. A fixed rate can offer you the security of knowing exactly how much your repayments will be. A variable rate may increase your repayments, but it also may decrease.

  • Other expenses – There are ongoing costs involved in owning a car. Along with your regular loan repayments, you will also need to budget for fuel, registration, insurance, servicing and maintenance.