How Your Credit Score Affects Car Loans in Australia

When you apply for a car loan in Australia, one of the first things lenders examine is your credit score. This three-digit number significantly influences not only whether you'll be approved but also the interest rate you'll be offered. Understanding how credit scores work and their impact on car financing can help you prepare for a loan application and potentially save thousands of dollars over your loan term.

What Is a Credit Score?

A credit score is a numerical representation of your creditworthiness—essentially, how likely you are to repay borrowed money based on your credit history. In Australia, credit scores typically range from 0 to 1,200 (for Equifax) or 0 to 1,000 (for Experian and illion), with higher scores indicating lower risk to lenders.

Your credit score is calculated by credit reporting agencies using information from your credit file, which contains details about your credit accounts, repayment history, credit applications, and any defaults or bankruptcies.

Credit Score Ranges and What They Mean

While different agencies use slightly different scales, general credit score categories are:

Excellent (800-1200 on Equifax): You're in the top tier of borrowers. You'll likely be approved for most car loans and qualify for the best available interest rates.

Very Good (700-799): You're above average and will generally receive favourable terms, though perhaps not the absolute lowest rates available.

Good (625-699): You're in a reasonable position. Most mainstream lenders will consider you, though rates may be slightly higher than advertised "from" rates.

Fair (550-624): Your options become more limited. Some lenders may decline you, and those who approve will likely charge higher rates to compensate for the perceived risk.

Below Average/Poor (0-549): Getting approved is challenging. You may need to look at specialist lenders who cater to borrowers with impaired credit, and rates will be significantly higher.

How Credit Scores Impact Interest Rates

The relationship between credit scores and interest rates is straightforward: the higher your score, the lower your interest rate is likely to be. This is because lenders use interest rates to price risk. A borrower with an excellent credit score represents minimal risk of default, so lenders can afford to offer competitive rates. A borrower with a fair or poor score represents higher risk, so lenders charge more to compensate.

The difference can be substantial. A borrower with excellent credit might secure a car loan at 5.5% per annum, while someone with fair credit might pay 9% or more. On a $30,000 loan over five years, that's a difference of over $2,800 in interest alone. Use our car loan repayment calculator to see how different rates affect your total costs.

Factors That Affect Your Credit Score

Payment history: This is typically the most significant factor. Making loan, credit card, and bill payments on time consistently builds a positive history. Late payments, defaults, and missed payments damage your score.

Credit utilization: How much of your available credit you're using matters. Maxing out credit cards suggests financial stress and can lower your score. Keeping utilization below 30% is generally advisable.

Length of credit history: A longer history of responsible credit use is viewed positively. This is why building credit gradually over time is beneficial.

Types of credit: Having a mix of different credit types (credit cards, loans, etc.) that you manage well can positively impact your score.

Recent credit applications: Each time you apply for credit, an enquiry is recorded on your file. Multiple enquiries in a short period can lower your score, as it may suggest financial difficulty or overcommitment.

Negative events: Defaults, court judgments, bankruptcy, and other serious credit events significantly damage your score and remain on your file for years.

How to Check Your Credit Score

In Australia, you're entitled to free access to your credit report once every 12 months from each credit reporting agency. The main agencies are Equifax, Experian, and illion. Many also offer free ongoing access to a basic credit score.

Before applying for a car loan, it's wise to check your credit report for several reasons:

Identify errors: Mistakes on credit files do happen. You might find accounts that aren't yours, incorrect default listings, or other errors that are unfairly lowering your score. These can be disputed and corrected.

Understand your position: Knowing your score helps set realistic expectations about the rates you might qualify for.

Address issues: If there are legitimate negative marks, you'll know what you're working with. Some issues can be addressed or explained to lenders.

Improving Your Credit Score Before Applying

If your score isn't where you'd like it to be, there are steps you can take to improve it before applying for a car loan:

Pay all bills on time: Start now with consistent, on-time payments for all your obligations—credit cards, utilities, phone bills, rent. Even a few months of positive payment history can help.

Reduce credit card balances: If possible, pay down credit card debt before applying for a car loan. Lower utilization improves your score and also reduces your debt-to-income ratio, which lenders assess.

Avoid new credit applications: Each application creates an enquiry on your file. In the months before applying for a car loan, avoid applying for other credit products.

Correct any errors: If you find mistakes on your credit report, dispute them with the relevant agency. Corrections can sometimes significantly improve your score.

Wait if possible: If you have recent negative marks like defaults, waiting for some time to pass while maintaining good credit behaviour can help your score recover.

Options for Borrowers with Poor Credit

If your credit score is low and you need a car, you still have options, though they come with trade-offs:

Specialist lenders: Some lenders specialize in car loans for people with impaired credit. They'll typically approve borrowers that mainstream banks won't, but charge significantly higher interest rates.

Larger deposit: Putting down a substantial deposit reduces the lender's risk and may improve your chances of approval or help you secure a better rate than your credit score alone would warrant.

Guarantor: Having someone with good credit co-sign or guarantee your loan can help you get approved. However, this places a significant obligation on the guarantor if you default.

Buy a cheaper car: Borrowing less reduces risk for the lender and may improve your approval chances. Consider a more modest vehicle while you rebuild your credit.

The Application's Impact on Your Score

When you apply for a car loan, the lender will access your credit file, creating an enquiry. Too many enquiries in a short period can lower your score. To minimize this impact:

Do your research first: Use calculators and comparison websites to narrow down options before formally applying.

Keep applications within a short window: Credit scoring models often treat multiple similar enquiries within 14-30 days as a single shopping event. If you're comparing lenders, try to do so within a couple of weeks.

Use pre-qualification tools: Some lenders offer "soft check" pre-qualification that doesn't affect your credit score. Use these to gauge your chances before formally applying.

Conclusion

Your credit score is a critical factor in car loan approval and the rates you'll pay. Understanding where you stand, taking steps to improve your score before applying, and being strategic about applications can make a significant difference to your financing outcome. Whether your credit is excellent or needs work, knowing how the system works puts you in a better position to secure the best possible deal. Use our car loan repayment calculator to see how different interest rates—which correlate to credit scores—affect your repayments and total costs.