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How Much Can I Borrow? Car Loan 101

Nov 1, 2023 | Finance Tips

Whether you’re looking for a new or used car, the maximum loan amount you can apply for depends on your financial circumstances. Based on your application, the lender will conduct a loan assessment and determine how much you can afford to repay based on your income, living expenses, and credit history.

If you’re planning on using a Car Loan to buy a vehicle, you’ll need to know how much you can borrow so you can narrow down your search options when looking for a car. It would be a huge waste of time shopping for cars only to find out later on that your dream car is way out of your price range. Knowing how much money you can apply to borrow for a Car Loan is essential for your search. You’ll know what sort of car you can afford before you set foot in a car yard.

Read on to find out how to work out how much you may be able to borrow for a Car Loan.


How much can I apply to borrow? — Car Loan

The amount you can borrow for any finance is called your ‘borrowing power’. It often depends on four key factors:
1. Your regular income.
2. Your regular expenses.
3. Any other debts and financial commitments you have.
4. The term of your finance.

All of these factors combine to determine how much you can afford for your Car Loan repayments. Your ability to afford (and make) your loan repayments will likely be the key criteria any lender will use when assessing your application.

Let’s look at a couple of examples.

Example 1

If you have a regular net (after-tax) monthly income of $4,000, your regular monthly expenses are $3,000, and you have no other debts, it may be determined that you have approximately $1,000 per month available for repayments. The lender would need to leave a buffer, so your whole disposable income isn’t used up. If you have $1,000 of disposable income, your lender might decide that you can safely afford loan repayments of $400 per month — being about 40% of your disposable income.

Example 2

If you have a regular net (after-tax) monthly income of $6,000, your regular monthly expenses are $2,500, and you have monthly home mortgage repayments of $2,000, it may be determined that you have approximately $1,500 per month of disposable income. With $1,500 of disposable income, the lender might decide you can afford repayments of $700 per month.

* Please note the scenarios above are to be used for the purpose of examples only and should not be relied upon in any way. These examples are not indicative of, or act as, approval of any kind. When applying for finance, all loan applications are subject to normal lending criteria, fees and charges, and terms and conditions that apply.

How Car Loan terms can affect your borrowing power

Your maximum borrowing power will also depend on the term of the loan you are approved for. Loan terms for standard Car Loans in Australia can often range from 1 to 7 years. As the tables below demonstrate, if you choose a longer term, the amount you can apply to borrow will likely increase. Similarly, the shorter loan term you choose, the amount you can apply to borrow may potentially decrease.

Example 1 (continued)

Loan term Interest rate Borrowing power
1 year 5% $4,000
2 years 5% $9,000
3 years 5% $13,000
4 years 5% $17,000
5 years 5% $20,000
6 years 5% $24,000
7 years 5% $27,000

Example 2 (continued)

Loan term Interest rate Borrowing power
1 year 5% $8,000
2 years 5% $16,000
3 years 5% $23,000
4 years 5% $29,000
5 years 5% $36,000
6 years 5% $41,000
7 years 5% $47,000

As you can see, you can often apply to borrow more money if you have a longer loan term. But it’s important to understand that the longer your term, the more interest you’ll likely pay over the life of the loan. With the first example above, if the loan term was one year, a monthly repayment of $400 per month would add up to approximately $4,800 at the end of the year. Whereas monthly repayments of $400 per month over seven years would add up to approximately $33,600 at the end of the loan term. This is a rough calculation and doesn’t accurately take any interest rates or other fees and charges into account. But you can see the implied point; the longer the term, the more likely it is that your borrowing power will be higher.


Does my credit score affect how much I can borrow for a Car Loan?

Yes, lenders will check your credit score as part of assessing your loan application — regardless of whether you’re looking for Personal Loans, unsecured Car Loans, or other Personal Loans.

Credit reporting agencies in Australia compile your credit score. You’ll be more likely to have your car finance approved at a lower interest rate if you have good credit. Lower interest rates also help to lower your repayments, which in turn can increase your borrowing power. You may be able to improve your credit score by paying all your debts on time and in accordance with the respective loan agreements and credit contracts.

On the other hand, if you have bad credit, it may not be the end of the road! You might be eligible to apply for a Car Loan or Personal Loan with bad credit. At Finance One, we’re not focused on your past credit history. We help give people a second chance at finance.


How can I increase how much I can apply to borrow for a Car Loan?

Besides increasing your term and developing a good credit score, some other ways to help increase your borrowing power may include:

  • Increasing your income if possible.
  • Reducing your expenses. For example, by eliminating or reducing non-essential expenses and discretionary spending.
  • Finding finance with the lowest possible interest rate.
  • Take a break from gambling.


How to compare Car Loans

When choosing between Car Loans, the interest rate is a fairly compelling deciding factor. However, the rates aren’t the only factor to consider.

Comparison rate

The Australian vehicle finance market is highly competitive. There is a huge range of lenders and loans available. When comparing loans, always compare the comparison rate, which shows you the interest rate plus all fees and charges, expressed as a percentage. It generally shows a more accurate representation of the total cost of the loan. Lenders in Australia are legally required to advertise the comparison rate on all consumer loan products. Sometimes, a loan might look attractive because it has a low interest rate; however, once you take the fees into consideration, the comparison rate is significantly higher than the interest rate — meaning the finance isn’t as cheap as it first seemed. For example, a loan with an interest rate of 5% might sound okay, but adding the fees on top of the interest rate could result in an 8% p.a. comparison rate. This could end up being much more costly than a loan with a 6% interest rate but a 7% p.a. comparison rate.

Assessment criteria

If you are aware that your credit score isn’t as good as it could be, be careful when applying for finance. A loan with a low rate and low fees is typically designed for people with an excellent credit score. If your credit score is on the bad side, you might be safer looking for a bad credit Car Loan and avoid adding extra enquiries to your credit history.

Repayment amount

When deciding on the right finance option for you, make sure you know your budget and understand how much you can afford to repay. This will help you to choose a loan with the right term. If you need a lower repayment amount, you may like to consider a longer loan term. You may end up paying more interest over a longer term, but if it means you can keep on top of your repayments in accordance with your loan agreement, it might be worth it.

Early repayment fees

Some Car Loans allow you to repay the finance early but charge you for it. If you think you would like to pay back your loan before the term is up, it might be a good idea to check if you’ll be charged extra to do so before applying.

Fixed rate or variable rate

Fixed or variable interest rates can make a difference to your budgeting. If you choose a fixed rate, your repayment amount will be constant throughout the term of the loan. If you choose a variable rate, you could enjoy interest rate drops, but there’s also the risk that rates will rise and increase your repayments. This is something you should be aware of so that you can figure out what will be best for you.

Secured vs unsecured loans

When financing a car, the vehicle is typically used as collateral for the loan, resulting in a secured loan. It is possible to buy a car with an unsecured loan; however, unsecured loans typically have higher interest rates and are more difficult to obtain approval for.

If you’d like to know how much you could borrow for a Car Loan, feel free to get in touch with us here at Finance One. We’ll be able to give you a clear indication of the loan amounts and actual rate applicable based on your personal and financial circumstances — something a loan calculator can’t do!

Disclaimer: The information above is of a general nature only and does not consider your personal objectives, financial situation or particular needs. You should consider seeking independent legal, financial, taxation or other advice to check how the information relates to your particular circumstances. We do not accept responsibility for any loss arising from the use of, or reliance on, the information.

When applying for finance with Finance One, all normal lending criteria apply. Fees and charges are payable. Terms and conditions apply.

How Much Can I Borrow? Car Loan 101

Nov 1, 2023 | Finance Tips

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Makala Elliott

Makala is the Marketing Manager at Finance One. She has worked in the Finance and Lending industry for over 10 years, gathering a wealth of experience. She is passionate about helping Australians get back on track with their finances by passing on her knowledge.

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