November 27, 2020
How do car loans work? “You pay back the money you owe on the car” – is it really that simple? When you finance a car, a lot happens behind the scenes.
OnlineLoans goes over the car loan process.
- Car type and loan amount things to consider
- Details and documents
- Circumstances match with rates and lender options
- Car shopping
- Settlement documents
- Repayments begin
Car loans in Australia
Did you know that around 90% of all new car sales in Australia are arranged through finance? Furthermore, there are 19.8 million registered cars for our 25-million strong population.
With numbers like that, it’s easy to see that car loans are pretty popular. Buying a car with a loan allows consumers to purchase newer, safer and more reliable vehicles sooner than if they saved for one. Additionally, all cars on finance must be comprehensively insured which is often arranged along with the car loan.
Most car loan holders report savings in repair and maintenance bills along with the peace of mind of a fully insured vehicle. With a history of credit and loan repayments, they also report finding finance for homes much easier.
Finance is big business when it comes to cars but what actually happens during the car loan process?
The Car Loan Process
1: Car type and loan amount
The beginning of the car loan process is actually deciding on a car type and a ballpark price. After checking out car reviews online, consumers usually have one or even a few vehicles in mind. They’ll get a rough idea of the price too.
> At this stage of the car loan process, it’s very difficult to know the exact dollar amount. Those adjustments are made in later steps.
For example, we’ll say we’re after a 2020 ute – a Toyota HiLux or Ford Ranger, both have models for around under $50,000.
Note: Car loans can be used to purchase new or used vehicles.
2: Details and documents
The borrower needs to provide details such as employment, residential status and an idea of their income and expenses. This is to make sure the borrower can actually afford to pay back the loan. Australia has regulations to help avoid putting people in difficult financial situations.
Lending institutions want to make sure borrowers can make loan repayments and still have enough left over for other bills and living expenses.
Documents such as ID, bank statements, payslips and privacy consent are needed to prove the details mentioned above. In most cases, these only need to be photos emailed through by smartphone.
3: Circumstances match with rates and lender options
After reviewing the above information, lending institutions will also check a borrower’s credit report which contains a credit score. In a nutshell, the better your credit score, the lower your interest rates tend to be.
> It’s a common misconception that ‘checking someone’s credit report affects their score’. This is not true, in fact, you’re able to see your credit report for free.
After matching the borrower’s circumstances and credit history to car loan options, the borrower selects an option best suited to them. This often includes different loan terms, rates and fees.
Tip: Don’t have ‘rate tunnel vision’. Low rates are great but there are other things to consider like how much you’ll have to pay per month and any account keeping fees or early repayment fees. Check all the details.
After selecting the right car loan option, the borrower is pre-approved for a certain vehicle and amount. This means the lending institution says ‘based on the information you provided, we’ll pay $X when you find vehicle Y’.
Using the example in step 1 above, a borrower might be pre-approved for a 2020 Toyota HiLux valued at around $50,000. Receiving the funds is dependent on the borrower actually finding a vehicle.
5: Car shopping
This is often one of the more fun parts of the car loan process. It’s when a borrower can select the colour, features and options they may want. If they are looking at used vehicles, the borrower may need to spend time finding a good condition example.
Most car loan pre-approvals last between 30 to 90 days so there’s no rush to decide.
Note: Usually, the actual vehicle costs less than the pre-approval amount. The loan amount and repayments are adjusted accordingly. This is where good negotiating skills come in handy.
6: Settlement documents
Now that the borrower has found the right car, additional documentation is needed. This includes:
Registration and VIN
Sales receipt & seller information
Certificate of Currency*
Insurance is also commonly arranged during this step.
*A Certificate of Currency is a document that confirms the details of car insurance. It states all necessary information such as the vehicle, commencement and expiry dates.
It’s during this step of the car loan process that ID copies are certified. Depending on the lender’s rules, this can be done at a police station, Justice of the Peace, post office or by various other officials.
Like in step 2, certified documents can usually be photographed and emailed through.
The settlement is the final part of the car loan process. The loan contracts are created and signed now that the vehicle details and final price are known.
This is the part of the car loan process where the borrower gets the keys and the seller receives funds directly from the lending institution.
Note: Borrowers do not receive funds in their accounts as car loans are for cars only. Instead, funds go from lender to seller so the seller’s bank details are required. If borrowers receive funds into their own bank account in order to buy a car, they’re using a personal loan product.
8: Repayments begin
It’s usually after two weeks from signing the loan contract that repayments start. These are typically direct debit arranged to be paid on a day specified by the borrower.
Note: The day of the week and frequency that the repayments are made are determined by the borrower and lender before signing the loan contract. If the borrower wishes to change the day and frequency of repayments, they can usually do so after a few months.
Tip: Most borrowers select to make repayments the day after receiving their income. This makes budgeting easier.
At the end of the day
For most Australians, buying a car on finance is part of life. Although explained in detail above, the car loan process is far easier and faster than in the past. The entire process can often be squeezed into one business day depending on the circumstances.