Car Finance for First-Time Buyers: Everything You Need to Know

Buying your first car is an exciting milestone, but navigating car finance for the first time can feel overwhelming. Without prior car loan experience, you might wonder what to expect, how to qualify, and what mistakes to avoid. This guide covers everything first-time car buyers in Australia need to know about financing their vehicle.

Understanding Your Budget

Before looking at cars or loans, determine what you can realistically afford. A common guideline is that your total car expenses, including loan repayments, insurance, fuel, and maintenance, should not exceed 15 to 20 percent of your take-home income.

Start by listing your monthly income and all existing expenses. The amount left over after essentials represents what is available for car costs. Be honest with yourself about your spending habits and leave a buffer for unexpected expenses.

Use our car finance calculator to see what loan repayments would look like at different price points. Remember that the purchase price is just the starting point. You will also need to cover registration, insurance, fuel, and ongoing maintenance.

Building Credit for Your First Loan

One challenge first-time buyers face is limited credit history. Lenders assess your creditworthiness based on past borrowing behaviour, but if you have never had credit, there is little to assess. This does not mean you cannot get a loan, but it may affect your options and rates.

If you have time before your purchase, consider building credit history. A credit card used responsibly with balances paid in full each month demonstrates good credit behaviour. Utility bills and phone contracts in your name also contribute to your credit file over time.

Lenders will also look at your employment stability and income. Having been in your current job for at least six months, or being able to show stable employment history, strengthens your application. Consistent income that clearly covers the proposed repayments is essential.

Saving for a Deposit

A deposit is crucial for first-time buyers. It reduces the amount you need to borrow, resulting in lower repayments and less interest paid. It also shows lenders you can save money and are committed to the purchase.

Aim for at least 10 to 20 percent of the car's value as a deposit. If you are buying a $20,000 car, that means saving $2,000 to $4,000 before applying for finance. Some lenders require a deposit, while others may finance the full purchase price but at higher rates.

Set up automatic transfers to a dedicated savings account to build your deposit. Even small regular amounts add up over time. Delaying your purchase by a few months to save more can result in significant savings over the loan term.

Types of Loans Available

First-time buyers have access to the same loan types as experienced borrowers. Secured car loans, where the vehicle serves as collateral, typically offer the best rates. Unsecured personal loans are also an option if you prefer not to have the car as security, though rates will be higher.

Avoid payday loans or extremely high-interest options, even if they seem easier to obtain. These can trap you in cycles of debt with repayments that consume your income. Mainstream lenders may have stricter requirements but offer fair terms and rates.

Consider credit unions as well as banks. Credit unions often offer competitive rates and may be more willing to work with first-time borrowers who have limited credit history but can demonstrate good income and savings habits.

What You Need to Apply

When applying for a car loan, you will typically need to provide identification documents such as your driver's licence and passport, proof of income including payslips or tax returns if self-employed, bank statements showing your income deposits and spending patterns, details of your existing debts and expenses, and employment information including your employer's contact details.

Gather these documents before applying to speed up the process. Having everything ready shows you are organised and serious about the purchase.

Common First-Time Buyer Mistakes

Buying Too Much Car: It is tempting to stretch your budget for a nicer car, but overcommitting can cause financial stress. Choose a car that comfortably fits your budget, not one that requires every dollar you have.

Ignoring Total Costs: Focusing only on the car price or monthly repayment while ignoring insurance, fuel, and maintenance leads to budget blowouts. Calculate all ownership costs before committing.

Skipping Research: Accepting the first finance offer you receive or buying the first car you see rarely leads to the best outcome. Research loan options, compare rates, and inspect multiple vehicles.

Lengthy Loan Terms: Extending the loan term to make repayments smaller seems attractive but costs more in interest. A five-year loan may have manageable payments while avoiding excessive interest charges.

No Mechanical Inspection: When buying used, always get an independent mechanical inspection before purchase. The cost of an inspection is minimal compared to discovering expensive problems after you have bought the car.

Getting Pre-Approved

Obtaining pre-approval before shopping for a car is particularly valuable for first-time buyers. Pre-approval tells you exactly how much you can borrow and at what rate. This prevents the disappointment of falling in love with a car you cannot finance.

Pre-approval also puts you in a stronger negotiating position at the dealership. You can focus on negotiating the car price without the pressure of on-the-spot finance decisions.

Starting Your Journey

Buying your first car is a significant step. Take the time to understand your budget, save a decent deposit, and research your finance options. Avoid common mistakes by staying within your means and making informed decisions.

Begin by calculating what you can afford using our car finance calculator. Enter different scenarios to understand how the purchase price, deposit, interest rate, and loan term all interact to determine your repayments and total costs.