Personal Car LoanHow Much Should I Borrow On My Car Loan?

How Much Should I Borrow On My Car Loan?

March 12, 2020

You’ve been looking at cars, wondering just how much you can afford to spend. You know you want to use a car loan to buy the car, but you’re not sure how much you can afford to borrow. So, what should you do?

In this post, we’re going to discuss the various factors that will affect the cost of your car loan and its affordability, to then look at how you can choose a car loan that will best suit your budget.


Interest is one of the biggest factors to impact the affordability of your car loan. So, with that in mind, let’s look at what may affect the rate you pay.

  • Length of Loan: Lenders typically vary the interest charged according to the length of the loan, so you may pay a different rate if you choose a five year loan over a three year loan. The total amount of interest you pay will also depend on the length of the loan. For the most part, the longer the loan, the more you will pay in interest overall.
  • Loan Amount: Lenders may also vary the interest rate according to the loan amount. So, if you were to borrow more or less on your car loan, your rate of interest may increase or decrease accordingly.
  • Credit Rating: Lenders will usually assess your credit to determine how much you will pay in interest on your car loan. If you have good credit, you are deemed less of a risk, which means you will pay a lower interest rate. If your credit is less than perfect, you will typically end up paying a higher rate of interest on your loan.
  • Secured or Unsecured: If you choose to secure your car loan against your car with a secured car loan, this is deemed less of a risk for lenders, so you will pay a lower rate of interest. Unsecured car loans often have a higher interest rate because they are higher risk.
  • New or Used: Whether you buy a new or used car will also affect the interest rate on your car loan. Loans for new cars (which may be up to two years old, depending on the lender) typically offer lower interest rates than used car loans.


Fees also work to affect the affordability of a car loan. Knowing which fees to look for – and how to avoid them – could make your car loan more affordable in the long run.

  • Establishment Fees: Also known as application fees or upfront fees, these are charged by the lender to establish the loan. You may pay them upfront, or you could parcel them into the loan.
  • Monthly Fees: These are ongoing fees paid each month. You may find that some loans charge upfront fees and no ongoing fees, while other loans charge ongoing fees and no upfront fees.
  • Extra Payment Fees: These are charged when you make an extra repayment on your loan. If you think you will make extra repayments, look for a loan that doesn’t charge these fees.
  • Early Repayment Fees: These are charged when you pay off your loan early. You may find some lenders don’t charge these fees, while others waive them if you pay off your loan within the last year of the loan term.
  • Redraw Fees: Loans that offer a redraw feature may charge a redraw fee. Try to keep redraws to a minimum, as that extra amount will help to reduce your interest costs.
  • Late Fees: If you are late making a payment, or you miss a payment, you will likely pay a fee. Set a reminder or automatic payment to avoid missing payments – and this fee.

Car Costs

It’s not just your car loan costs you need to think about when determining how much you can afford to borrow. You should also think seriously about the costs associated with keeping a car on the road.

These include petrol, registration (rego), CTP, car insurance, roadside assistance, tolls, servicing and repairs. Use the government’s Moneysmart cars app to calculate how much you should set aside for these running costs month to month.


So, now you know what can affect the cost of a car loan – and what costs you will need to cover on top of your loan – how do you work out how much you can actually afford to borrow?

First, start by creating a budget. Make a note of all incomings and outgoings (using an app makes this process much easier). Find out how much you can afford to pay out on a loan each month. If things are a bit tight, use your budget to see where you could cut back.

Now you’ve got a figure in mind, use a car loan calculator to see how much that would allow you to borrow over various loan terms. Keep in mind that while a longer loan term makes repayment amounts smaller, the amount you pay overall will likely be higher.

Choosing the right loan is a balancing act, in that you have to choose a repayment amount that is large enough to keep interest costs as low as possible, yet small enough to remain affordable. Once you’ve figured that out, you will have a total loan amount that you can afford to borrow.

Borrowing Capacity

When you apply for a car loan, the lender will assess your borrowing capacity to make sure you can indeed afford the amount you are asking for. As long as you have done your sums correctly, this shouldn’t be a problem.

In assessing your borrowing capacity, the lender will look at your income, your assets, your debts and various other factors. You will usually have to provide proof of these when you apply.

Comparing Car Loans

Time to compare! The amount you pay in interest and fees can vary enormously – according to the factors mentioned above, and the lender. It’s essential you compare all your options carefully to ensure you get the best – and most affordable – car loan for you.

Luckily, with Car Loan World on your side, this process becomes oh-so much easier. What are you waiting for? Hit get a quote to get started.


  • Roland is the founder of Credit World Pty Ltd and a leading financial expert in Australia. He has extensive knowledge on car loans in Australia. Known as a car loan expert, Roland has been featured on TV and in various publications. He started in finance comparison in 2005. Now a 17 year industry veteran.