Buying your first car is exciting, but navigating car finance can feel overwhelming. According to ASIC's MoneySmart, shopping around for a car loan before visiting a dealership can save you thousands in interest and fees. This guide covers everything first-time buyers need to know.
Types of Car Loans Explained
Secured Car Loan
The car is used as security (collateral) for the loan. If you can't make repayments, the lender can repossess the vehicle. Because this reduces the lender's risk, secured loans typically offer lower interest rates.
Unsecured Personal Loan
No asset is used as security. The lender relies on your creditworthiness alone. These loans carry higher interest rates but your car isn't at risk if you face financial difficulty.
Dealer Finance
Finance arranged through the car dealership. While convenient, MoneySmart warns this often isn't the best deal. Always compare with other options first.
How to Calculate Your Budget
Before applying for a loan, determine how much you can realistically afford. Most lenders prefer a debt-to-income (DTI) ratio under 40%.
The 20/4/10 Rule
A commonly recommended guideline for car affordability:
- 20% deposit - Put down at least 20% of the car's value
- 4 years maximum - Keep the loan term to 4 years or less
- 10% of income - Total car costs (repayments, insurance, fuel, maintenance) should be under 10% of gross income
Total Cost of Car Ownership
Don't just consider the loan repayment. Factor in all ongoing costs:
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Try Car Loan CalculatorDocuments You'll Need
Being prepared with the right documents speeds up your application. Here's what most lenders require:
Identity Documents (100 points)
- Australian driver's licence (40 points)
- Australian passport (70 points)
- Medicare card (25 points)
- Birth certificate (70 points)
Proof of Income
- Last 2 payslips (employed) or last 2 years tax returns (self-employed)
- Employment letter confirming position and salary
- Centrelink income statement (if applicable)
Financial Information
- Last 90 days of bank statements
- Details of existing debts and credit cards
- List of monthly expenses
Vehicle Information
- Make, model, year, and kilometres
- VIN (Vehicle Identification Number)
- Purchase price or dealer quote
Tips for First-Time Borrowers
Get Pre-Approved Before Car Shopping
Knowing your budget before visiting dealerships gives you negotiating power and prevents overspending. Pre-approval typically lasts 30-90 days.
Compare Multiple Lenders
Interest rates and fees vary significantly. A broker can compare multiple lenders for you, or use comparison sites. Even 1% difference in interest can save thousands over the loan term.
Consider a Shorter Loan Term
While longer terms mean lower monthly payments, you'll pay more interest overall. A 3-4 year term is often the sweet spot between affordability and total cost.
Save for a Deposit
Even 10-20% deposit reduces your loan amount, lowers your interest rate, and shows lenders you're financially responsible. It also reduces the risk of being "underwater" (owing more than the car is worth).
What to Avoid
ASIC Warning on Defaults
According to ASIC's 2025 review, almost half of all consumers who defaulted on car finance did so within the first six months. Of vehicles repossessed and sold, nearly 90% of consumers still owed more than half of their original loan amount.
Dealer Add-Ons
MoneySmart warns that dealer extras like loan protection insurance, gap cover, and tyre/rim protection are often poor value. Don't feel pressured to buy them.
High Establishment Fees
ASIC found loan establishment fees as high as $9,000 on a $49,000 loan. Always check the comparison rate, which includes fees, not just the advertised interest rate.
Borrowing More Than You Need
Just because you're approved for a certain amount doesn't mean you should borrow it all. Stick to your budget and what you can comfortably afford.
Skipping the Vehicle Inspection
For used cars, always get an independent mechanical inspection and a PPSR check to ensure the car isn't encumbered or stolen.
Official Resources
Ready to Get Started?
Now that you understand how car loans work, take the first step. Check your options with no impact to your credit score.