For many Australians, buying a new car is their biggest purchase. And it’s also one of the decisions that can have long-term implications – from how much money you might lose if you decide to sell your vehicle in years ahead to your ability to secure further credit.

That’s particularly important for people who are looking to finance their new vehicle because they lack the cash to pay for it outright. And the rates on offer can vary widely, depending on whether your application meets with approval and what you can afford, so understanding how lenders assess your application is crucial.

Here are some key points to keep in mind when applying for a car loan:

What’s the rate?

One of the first questions you should ask a lender is how they determine their interest rates. As with other types of loans, it comes down to whether you have a good or bad credit history – or something in between. If your credit rating is poor, you’ll likely end up with a higher interest rate and less attractive terms and conditions. That’s because lenders see you as a bigger risk and assume you’re less likely to repay the loan in full.

What about the fine print?

Of course, there’s more to it than your credit history. The rates and terms that lenders offer also depend on how much you want to borrow and for what period of time – all crucial pieces of information that you should disclose upfront when you apply for a loan. When it comes to borrowing limits, some lenders will only consider providing a loan for a used car if it’s worth less than $20,000. Some lenders may also ask you to fix the rate of interest you’ll pay, while others will let you choose your repayments – although they can be more flexible with buying a new car.

What else does the lender check?

In addition, lenders will review your income and existing debts as part of your application. They’ll check how much you earn and what sort of assets you have, such as cash in the bank or other property that could be sold if things go wrong.

And because it’s so important to keep on top of your repayments, they’ll also check whether you have a history of managing your other debts.

Why does all this matter?

When it comes to deciding whether you can afford a particular car and the rate at which they’ll lend you money, lenders don’t just look at what you earn or own – they also consider your living expenses. If there’s any spare cash after that, then you may have a better chance of getting approved for the loan. But if you spend all your money on rent, food and other costs, it’s going to be more difficult to get a car loan.

What else should I consider?

It can also pay off to be aware of some of the common issues that face borrowers when they’re looking for a car loan. For example, if you have a bad credit history or are buying a used vehicle that’s worth less than $20,000, then your lender may require you to use the “gap insurance” option when insuring your car.

You should also check if there are any car finance deals specific to your city – for example, if you live in Melbourne look into Driva car finance Melbourne for the best possible loan options.

Danny Watson