What is a car loan?
A car loan is a specific type of personal loan that you can use to buy a new or used motor vehicle when your savings won’t cover the total cost upfront. When you take out a car loan, you will need to make regular repayments over a fixed term towards the lump sum you borrowed (the principal), as well as interest accrued. The interest rate will apply on the loan amount from the time you take out the loan.
Car loans typically range from $5,000 to $100,000 and often have loan terms from one to ten years. Interest rates generally vary between 2.99% and 10% for secured car loans, and up to 15% for unsecured loans. The interest rate on a car loan can often be lower than on a personal loan as the loan is often secured by the car you are purchasing.
It’s generally a good idea to spend some time comparing your options when it comes to choosing a loan, as the interest rate isn’t the only thing you should consider.
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How do car loans work?
A car loan is a formal car finance arrangement between three parties: the buyer (you), the vendor (someone selling the car, typically a car dealership), and the lender (the organisation providing the money). You can get a car loan to buy a new or used car.
There are six steps involved in getting a car loan:
- Search and compare car loans to find one that best suits your needs
- Submit an application for the loan
- If your application is approved, the lender will agree to lend you a certain amount to buy a vehicle
- Sign a purchase agreement with the vendor
- The lender pays the vendor on your behalf
- You repay the lender, usually over a period of several years
Finding the best car loan for your needs is a key part of the process. Everyone's financial situation is unique, so there's no one "best car loan" to cover every possible need. To help you find your best car funding option, a comparison of car loans is critical to ensure your loan fits your particular needs.
So, where do you start? Once you know what sort of car you would like to buy, you’ll need to consider how much you can borrow before you start comparing loans.
How much can I borrow with a car loan?
The amount you can borrow, or your borrowing capacity, depends on your income, your expenses, your assets and any other debts that you may hold. Your credit history is also relevant, as lenders use it to determine your creditworthiness. If you have previously defaulted on loan repayments or have often been late in making repayments, a lender may reduce the amount they are willing to lend to you, or even reject your loan application altogether.
If you want to take out a secured car loan, the amount you can borrow will also depend on the cost or value of the car. You may not receive as much from a lender to buy a used car as you would to buy a new car. In fact, some lenders might only issue secured loans on cars that are less than five years old, though others may consider certain used vehicles that are older.
Once you have an idea of what you’d like to borrow, you can use a car loan calculator to find out how much your repayments will be.
Are there any other costs to consider?
When calculating how much you can afford to borrow, it could be a good idea to factor in the other costs involved with buying and owning a car to ensure you are budgeting correctly. Keep in mind that even if you’ve previously owned a car, every car typically has different running and maintenance costs. These can include:
- Stamp duty
- Car insurance
- Petrol costs
- Regular services, maintenance and repairs
- Road tolls
How do you compare car loans?
To compare car loans, make sure you are comparing apples with apples. That is, secured car loans must be compared with other secured car loans, and unsecured loans with other unsecured loans. It’s generally a good idea to consider the interest rates, any applicable fees and other loan features. Also think about considering the lender’s reputation and how good their service is.
If you factor the following details into your car loan comparison, you’ll likely be better equipped to work out which car loan best suits your needs.
1. Interest rates
Comparing interest rates tends to be an important first step in comparing loans. There are two parts to a loan’s interest rate: the advertised rate and the comparison rate. The advertised rate is just the interest rate you pay on the loan, while the comparison rate combines the advertised rate and the main fees, including any upfront and ongoing fees. Consider taking both rates into account when making car loan comparisons.
Car loan fees can often significantly impact how much money you have to pay out over the life of your loan. Fees typically include the following:
- Application fees, also known as upfront fees
- Account-keeping fees, such as monthly fees or ongoing fees
- Early exit fees
- Redraw fees
Different lenders will generally charge different fees to boost their bottom line, so it can be a good idea to ask about all of them.
Tip: Need more information on how to get the best car loan for your needs? Check the car loan guide right now.
Car loans can vary quite a bit in terms of what they offer. It’s a good idea to consider asking about all of a loan’s features, as they can affect how much you will need to pay over the life of your loan. Some of these features include:
- Fixed or variable: You will need to decide whether you want your loan’s interest rate to be fixed or variable. If your loan has a fixed interest rate, your repayments will be the same throughout the life of the loan, which could make budgeting more manageable. If you choose a variable interest rate, however, the rate can change during the loan’s term meaning your repayments could potentially increase or decrease.
- Extra repayments: Some loans will allow you to make extra repayments additional to your regular repayments. Having the option to make extra repayments on your loan could mean saving money on interest and paying your loan off faster.
- Redraw facility: Having a loan with a redraw facility means you are able to redraw any additional payments you have made, which can come in handy if you need to access some extra cash down the track.
- Pre-approval: Some financing options will offer pre-approval, which is when the lender agrees to give you a loan to buy a car before you make the purchase. This can give you a better idea of the price range you are working with before you start shopping for a car.
4. Loan term
Some lenders are very flexible in how much time they’ll give you to pay off the loan, while others will limit your options. As a general rule, a shorter loan term will mean higher monthly repayments but a lower total loan repayment, while a longer loan term will mean lower monthly repayments but a higher total loan repayment, as you will be paying back more in interest costs. Ultimately, you need a car loan that you can repay comfortably, over a period of time that suits your needs.
5. Loan type
Some lenders will allow you to choose between a secured car loan and an unsecured car loan. Lenders will typically charge higher interest rates for unsecured car loans because they regard them as riskier than secured car loans.
6. The lender
There’s a good chance you already bank with one of Australia's big four: ANZ, Commonwealth Bank, NAB or Westpac. While they're big, they may not offer the best loan for your needs. Shop around and you may find a more competitive car loan from a smaller bank or a non-bank lender.
Who can get a car loan?
To qualify for a car loan, you'll need to show a lender that you have a regular source of income to prove you can afford to make regular repayments. Lenders will want to know if you are employed and how long you have been with an employer. If you’re self-employed, a lender may require you to show two years’ trading history in order to qualify for a car loan.
The best-case scenario is that you have regular income and an excellent credit rating. You may still be able to qualify for a car loan if you're a student or a pensioner, though you may pay a higher interest rate than someone who is employed full-time.
Knowing your credit rating and credit history will give you a glimpse into what you can expect from car loan rates. If you have a bad credit history, there's still hope, but you just might be looking at bad credit car loans, where the rates may not be as competitive.
Car loan benefits and disadvantages
What are the benefits of a car loan?
Using a car loan to help you buy a car today comes with many benefits, including:
- You can use a car loan to borrow more money, opening up options for vehicles that you might not have been otherwise able to afford
- You don't have to repay a car loan immediately, and can take as long as ten years to repay the loan
- The car loan’s interest rate may be much lower than that of other finance options, such as an unsecured personal loan
What are the disadvantages of a car loan?
There can be some negatives to getting a car loan, which you will need to consider and weigh up against the benefits. These include:
- Repayments need to be made regularly – if you stop repaying, you may lose the car, and potentially face other penalties, such as legal costs
- Your car loan may have restrictions on the type of car you can buy, such as whether it is new or used, or a sports car
- The amount you can borrow may be limited by your borrowing capacity and creditworthiness
What types of car loans are available?
There are a number of different types of car loans on the market, each of which meet specific financing requirements. Generally speaking, there are seven different ways to finance a vehicle:
- Unsecured Car Loans: car finance where you don’t provide collateral
- Secured Car Loans: car finance where you do provide collateral
- Chattel Mortgage: a specialist car finance option for business use
- Operating Lease: more like a long-term car rental arrangement, involving a company leasing a car for an extended period
- Commercial Hire Purchase: closer to a rent-to-buy arrangement, generally involving a finance company buying a car on your behalf and letting you use it in return for regular rental payments. After a number of payments, you may own the car
- Car Lease: similar to a commercial hire purchase, but with more options. You rent the vehicle for a set period and at the end of the lease, you either return the car or buy it
- Novated Lease: like a car lease, but with a more complicated ownership structure, as you acquire the car from a second party (usually an employer) which in turn leases it from a third party (a finance company)
How to apply for a car loan
Applying for a car loan can be a simple process if you do your research and are well prepared. Here are six steps that could make the application process easier for you:
- Check your credit score: This should only take a few minutes to do through an online provider, usually free of charge. You’ll just need some identification such as your passport and driver’s license. Once you know your credit score, you’ll have a better understanding of which loans and interest rates might be available to you.
- Assess your budget: Use a car loan calculator to get an estimate of the total cost of a potential loan and what your repayments could be. This could put you in a better position to make an informed decision.
- Search and compare car loans: RateCity allows you to easily compare a wide range of car loan options so you can find one that best suits your individual needs.
- Check the eligibility criteria: Once you have compiled a shortlist of potential car loans, check to see whether you meet all of the eligibility requirements. Keep in mind that these can differ from loan to loan. Consider reaching out to the lender if you are unsure about anything.
- Prepare your application: If you're already comparing car loans on RateCity, you can click directly through to the lenders website where you can apply online for your chosen car loan. It might be a good idea to have all of your required documentation ready before you get started.
- Submit your application and await a decision: Once you submit the information required, you may receive an immediate response from the lender with an update of your application status, or this may take a little longer. Car loan approvals can happen in as little as a few hours to as much as a few days.
What is the best car loan?
The best car loan is a car loan that meets all your needs, taking into account price, features and benefits. Shopping around and making car loan comparisons is a key part of the process. There are dozens of car loan providers in Australia, and you shouldn't assume your current bank will offer you the lowest interest rate or the most suitable loan for you. RateCity allows you to compare car loans by costs and features and can also considerably reduce the time it takes for you to do your research.
Sally is the Research Director for RateCity and a regular commentator on television and radio about personal finance matters. She is passionate about helping everyday Australians get access to affordable finance options, and helping people save money through smart budgeting and easing everyday expenses. Sally is a contributor to news outlets including Fairfax, News Ltd and Money Magazine, among others.
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Frequently asked questions
What is depreciation?
Depreciation is the reduction in the value of your car. Almost every car loses value each year, although at different rates. As a guide, cars depreciate on average by 14 per cent per year in the first three years and then eight per cent per year after that.
What is a finance broker?
Finance brokers help borrowers organise car loans with lenders – that is, they act as middlemen between borrowers and lenders. While lenders will only recommend their own products, finance brokers recommend products from a range of lenders. Finance brokers need to be accredited with a lender to do business with that lender; a typical broker will be accredited with between 10 and 30 lenders. Finance brokers generally don’t charge consumers; instead, they receive commission payments from lenders.
What is salary packaging?
Salary packaging is an arrangement you can make with your employer that can allow you to buy a car from your pre-tax salary. The advantage of salary packaging is that it will redue your taxable income.
What is an establishment fee?
Some lenders will charge you an establishment fee, or one-off upfront fee, to cover the cost of setting up your car loan.
What is a refinance?
A refinance is when you swap one car loan with another. For example, you might take out a car loan with Lender X because it is the best on the market at the time – but two years later, you might switch to Lender Y because you discover that it now has the best loan. Conditions and fees often apply when you refinance.
What is a redraw facility?
A redraw facility allows you to re-borrow any funds you may have repaid ahead of schedule – although conditions and fees often apply. Not all car loans come with a redraw facility.
What is compulsory third-party insurance?
Compulsory third-party insurance, also known as CTP insurance or a green slip, is compulsory if you want to register a vehicle in Australia. If you’re responsible for a car accident, your compulsory third-party insurance will be used to pay any compensation due to anyone who might be injured or killed. However, compulsory third-party insurance doesn’t cover you for vehicle damage or theft.
What is a finance lease?
A finance lease, also known as an asset lease or car lease, is an arrangement by which a finance company buys a car on your behalf. You get to borrow the car in return for making regular payments to the financier. At the end of the lease, you can either buy the car or hand it back.
What is a chattel mortgage?
A chattel mortgage is a mortgage on a movable item. In the case of a car loan, the chattel is the vehicle. The lender maintains a mortgage over the chattel/vehicle until the loan is fully repaid.
What is a CHP?
A CHP, or commercial hire purchase, is an arrangement by which a finance company buys a car on your behalf. You get to borrow the car in return for making regular payments to the financier. Once the final payment is made, you take ownership of the car.
How do you get a car loan?
There are four different ways you can get a car loan. You can go straight to a lender. You can get a finance broker to organise a car loan for you. You can get ‘dealer finance’ – which is when the car dealer organises a car loan for you. Or you can organise your own car loan through a comparison website, like RateCity.
Whichever method you choose, you will need to provide proof of identification, proof of income and proof of savings. So you may be asked for any combination of passport, driver’s licence, bank statements, payslips, tax returns and utility bills. You might also be asked to provide proof of insurance.
What is the principal?
The principal is the value of the loan that is still outstanding. So if a borrower takes out a $20,000 loan, the principal is $20,000. If the borrower repays $5,000 in the first year, the principal is now $15,000.
What is equity?
The equity is the share of the car that you own. For example, if you take out a $15,000 loan to buy a $20,000 car, you have $5,000 of equity in the vehicle, or 25 per cent. (The lender has the other 75 per cent.) Equity changes over time as you pay off your loan and your car depreciates in value. For example, two years later you might now owe $10,000 on your car, which might now be worth $15,000. In that case, you would still have $5,000 of equity in the vehicle, but your share would be 33 per cent.
What is repayment frequency?
Repayment frequency is how regularly you have to make car loan repayments to your lender. The most common repayment frequency is monthly, but many lenders will also give you the option of making fortnightly or weekly repayments.
What is resale value?
The resale value is the price you could realistically charge if you were to sell your car. Almost every car loses value each year, although at different rates. As a guide, cars depreciate on average by 14 per cent per year in the first three years and then eight per cent per year after that.
What is an asset lease?
An asset lease, also known as a finance lease or car lease, is an arrangement by which a finance company buys a car on your behalf. You get to borrow the car in return for making regular payments to the financier. At the end of the lease, you can either buy the car or hand it back.
What is an interest rate?
The interest rate is the price you have to pay for borrowing money. The interest rate is expressed as an annual percentage of however much of the loan remains to be paid. For example, if you took out a $10,000 car loan with an interest rate of 8.75 per cent, you would be charged 8.75 per cent of $10,000, or $875 of interest per year. But if you then reduced the outstanding loan to $9,000, your annual interest bill would be 8.75 per cent of $9,000, or $787.50.
What is dealer finance?
Dealer finance is a car loan organised through a car dealer – as opposed to car loans organised by a finance broker or directly by the lender.
Where can I find lenders who offer no credit check car loans?
One thing to bear in mind is that lenders who offer no credit check car loans are likely to charge higher interest rates and higher fees than on car loans that include a credit check. Also, lenders who no credit check car loans might expect you to pay a higher deposit. You might also be expected to provide security.
Lenders regard no credit check car loans as riskier than other car loans, which is why it’s a niche product that often features special conditions.