Your first car loan: a step-by-step guide

Buying your first car is a big milestone, and for most people it also means taking out their first loan. If you've never applied for finance before, the process can feel unfamiliar. This step-by-step guide walks you through what to do, in order, so you can borrow with confidence and avoid common first-timer mistakes.

Step 1: Set a realistic budget

Start with what you can comfortably afford each week or month, not the car you want. Look at your take-home pay, then subtract rent, food, bills, phone, subscriptions and savings goals. What's left is roughly what you have for a car repayment and running costs.

Running costs are where first-time buyers often get caught out. Remember to include:

• Insurance, which can be higher for younger and less experienced drivers
• Registration and CTP
• Fuel or charging
• Servicing, tyres and repairs
• Parking and tolls

Our calculators can help you estimate repayments for different loan amounts.

Step 2: Check your credit report

Even if you've never had a loan, you may have a credit file from a phone plan, utility account or buy now pay later service. Request a free copy from Equifax, Experian or illion and check it for errors or unpaid bills you didn't know about. Fixing problems before you apply is much easier than after.

If your file is very thin, that's normal for first-time borrowers. Lenders will lean more on your income, job stability and banking history.

Step 3: Build up a deposit

A deposit isn't always required, but it can help. It reduces how much you need to borrow, lowers your repayments and shows lenders you can save. For example, if you're buying a $20,000 car and you've saved $4,000, you'd only need to borrow $16,000.

Regular saving also builds a track record in your bank statements, which lenders may look at.

Step 4: Understand your loan options

Secured car loan

The car is used as security for the loan. These are commonly available for new and newer used cars and are often priced lower than unsecured loans, because the lender takes on less risk. Learn more about car loans.

Unsecured personal loan

Not tied to the car, so it can suit older vehicles or private sales that don't meet a lender's security criteria. It's usually priced higher. See personal loans.

Dealer finance

Offered at the dealership. It can be convenient, but it's worth comparing the total cost with other options before signing.

Novated lease

Available through some employers via salary packaging. It can have tax implications, so check with an accountant, and see our guide comparing car loans and novated leases.

Step 5: Get your documents ready

• Photo ID such as a driver licence or passport
• Recent payslips, often the last two or three
• Recent bank statements
• Details of any existing debts, including credit cards and buy now pay later
• A list of your regular living expenses
• Employment details, including how long you've been in your role

Some lenders want to see that you've been in your job for a minimum period, and probation periods or casual employment can sometimes mean providing extra evidence.

Step 6: Consider pre-approval

Pre-approval gives you an indication of how much a lender may be willing to lend before you choose a car. It lets you shop within a clear budget and negotiate with more confidence. Keep in mind that pre-approval is conditional and usually lasts for a limited time, and final approval depends on the car and any changes to your circumstances.

Step 7: Choose the right car

With a budget in hand, shop around. For a first car, reliability and running costs usually matter more than features. Before buying:

• Do a PPSR search on any used car to check it isn't subject to existing finance or recorded as written off or stolen
• Get an independent mechanical inspection on a used car
• Get insurance quotes for the specific model before committing
• Confirm the car meets your lender's requirements, especially around age

Step 8: Compare the loan offer carefully

Don't just look at the weekly repayment. Check:

• The comparison rate, which includes most fees and charges and gives a truer picture of cost than the headline rate
• Establishment and ongoing fees
• The total amount you'll repay over the full term
• Any balloon payment due at the end
• Early repayment or exit fees, in case you want to pay the loan off sooner
• Add-ons like extended warranties or insurance products bundled into the loan. You don't have to accept these, and they increase how much you borrow.

Step 9: Sign and settle

Once you're happy with the terms, read the contract fully before signing and ask about anything you don't understand. The lender then pays the seller, which is called settlement, and you collect your car. Make sure your insurance is in place from the moment you take possession.

Step 10: Manage your loan well

Your first car loan is a chance to build a positive credit history. Set up automatic repayments that line up with your pay cycle so you never miss one. If you can afford extra repayments and your loan allows them without penalty, they can reduce the interest you pay. If you ever have trouble making repayments, contact your lender early, as they may be able to offer hardship assistance.

Common first car loan mistakes

• Borrowing the maximum instead of a comfortable amount
• Forgetting insurance and running costs
• Applying with several lenders at once and creating multiple credit enquiries
• Accepting add-ons without understanding them
• Skipping the PPSR check on a used car

Getting help with your first car loan

If you'd like a hand, The Finance Club can connect you with a specialist broker from our partner network who can explain the process, outline options that may suit you and help you prepare your application. When you're ready, you can start an enquiry in a few minutes.

This article is general information only and does not take into account your objectives, financial situation or needs. Speak to your broker, and your accountant where tax is involved, before making a decision.