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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 are the pros and cons of guarantor car loans?
Like all things, there are positives and negatives to guarantor car loans, though one may outweigh the other depending on your needs.
Guarantor car loan pros may include that you’re more likely to be approved for a long if you have no credit or a history with bad credit, that you’re more likely to secure a car loan with a lower interest rate, and that because your guarantor car loan is based on a relationship, you will be more inclined to meet your repayment schedule.
However, there are negatives, as well. Guarantor car loan cons may include leaving a detrimental mark on a personal relationship with added strain if you don’t meet your repayments, and you may take out a loan that you can’t actually afford.
Weighing these pros and cons will give you a greater understanding of whether a guarantor loan is ideal for your circumstances.
What is stamp duty?
Stamp duty, or motor vehicle duty, is a tax you pay when you transfer a car into your name. Stamp duty applies to both new and used cars. Stamp duty is a state tax, so rates and conditions vary from state to state: New South Wales, Victoria, Queensland, Western Australia, South Australia, Tasmania, ACT and Northern Territory.
Can I get a car loan with bad credit?
Yes, you can get a car loan with bad credit, although you’ll probably find the process trickier and dearer than that experienced by people who have good credit histories.
You can find a number of lenders that specialise in bad credit car loans. However, make sure you compare bad credit car loans before you sign on the dotted line, because not all car loans are alike and having bad credit may mean you are more likely to be hit with higher fees and interest rates.
If you have bad credit, it’s important not to take out a car loan unless you can afford the repayments because a default could further damage your credit rating. Conversely, if you make all the repayments and repay the loan successfully, your credit rating might improve.
What is a novated lease?
A novated lease is a car lease that is ‘novated’, or transferred from one party to another. Novated leases are often used when companies provide a car as part of a salary package. The employer signs for the lease and makes the lease payments, but the employee assumes the responsibility of looking after the car. While most car leases involve two parties, novated leases involve three – employer, employee and financier.
Do I need good credit to get a car loan?
You don’t need good credit to get a car loan, although the worse your credit history, the harder and more expensive it’s likely to be.
Some lenders will do business only with borrowers who have good credit. However, there are other lenders that are willing to offer car loans to borrowers who don’t have good credit. The catch, though, is that they may charge higher interest rates and fees, and also require more paperwork.
If you don’t have good credit and want a car loan immediately, you can search for lenders that work with bad credit borrowers. If you are able to wait, you can work to improve your credit score and then apply for a car loan once you have good credit.
Where can I get a student car loan?
Student car loans are not a necessarily a product in and of themselves, but what you may be looking for is a guarantor car loan.
A guarantor car loan has a third-party act as a form of guarantee for your loan application, telling the bank or lender that if you default on your loan, someone will pay the loan repayments.
Going guarantor on a car loan is no new thing, and before internet-based credit scores, guarantor car loan applicants would apply for loans with a guarantor or property owner who could vouch for the person borrowing the loan.
To get a guarantor car loan, you’ll need someone willing to act as a guarantor for your car loan.
Can I get a no credit check car loan?
You may be able to get a no credit check car loan in certain circumstances, although it’s important to weigh up your options before doing so.
Most lenders refuse to provide no credit check car loans, because they don’t want to give loans to borrowers without first confirming that they have a track record of repaying debts. So any lenders that do provide no credit check car loans would take measures to protect themselves against the risk of default.
That’s why no credit check car loans have higher interest rates than other car loans. Also, borrowers often have to provide security and put down a larger deposit.
What is a guarantor car loan?
A guarantor car loan is a type of loan that features a guarantor on the agreement. The guarantor is a third-party individual, often a friend or relative, who guarantees the loan will be repaid if the borrower defaults on the car loan.
Guarantor car loans are often geared at people who might otherwise struggle being accepted for a secured car loan when purchasing a vehicle. Some of the reasons might include a lack of credit history such as with a student or young person, if there’s bad credit, or age as a factor such as with pensioners.
What is CTP insurance?
CTP insurance, also known as compulsory third-party 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 CTP insurance will be used to pay any compensation due to anyone who might be injured or killed. However, CTP insurance doesn’t cover you for vehicle damage or theft.
What is a credit score?
Your credit score is a number that represents how credit-worthy you are. The higher your credit score, the more credit-worthy you are and the more likely you are to receive loans from credit providers.
There is no industry standard for credit scores – different credit reporting bodies use different methodologies. For example, Equifax gives consumers scores between 0 and 1,200; Illion (through the Credit Simple service) gives scores between 0 and 1,000; and Experian gives scores between 0 and 999.
When it comes to car loans, lenders tend to offer lower interest rates to borrowers with better credit score. There are steps you can take to improve your credit score, including paying bills on time and paying off existing loans.
What is the role of a guarantor on a car loan?
The role of a guarantor on a car loan is to meet repayments if the borrower of the loan were to default for any reason, such as not being able to afford it.
Useful for loan applicants with poor or bad credit, a guarantor makes it possible for these loans to be made secure, because there’s less risk for a lender overall.
Companies will likely give fair warning before they charge a guarantor for the costs of the loan, or before they repossess anything of the guarantor’s that may have been used as security. Still, it is important for a car loan guarantor to fully understand their responsibilities before they commit to the transaction.
Should I service my own car?
There are also costs associated with vehicle ownership, such as paying for petrol and the obligatory ongoing maintenance. But should you cut down on costs by servicing your own vehicle?
If you’re considering getting out the tool box, spanner, and grease-laden towel, you need to carefully weigh up the risks and benefits. A trained mechanic will need to complete certain tasks, while you may be perfectly capable to handle other aspects yourself.
If you’re short on time, it may be worth paying for the convenience of a full vehicle service. However if you’re trying to slash your expenses, there are some basic maintenance tasks that you can complete yourself.
You should call a mechanic if you’re unsure about a vehicle maintenance task you’re about to take on. However there are a number of maintenance tasks that you may be able to complete with your own two hands including:
- Replacing your car battery
- Changing the oil
- Replacing worn windscreen wipers
- Replacing blown fuses
Remember to keep your car’s body in good condition, by washing and applying a protective wax on a regular basis, too.
Always check your car warranty agreement as some new car purchases come with an extended car warranty provided your services are conducted at the vehicle service centre where you purchased the car. In these circumstances, you may find the service fee is capped, alleviating some of the maintenance woes.
What is a bad credit car loan?
A bad credit car loan is a car loan for borrowers who have ‘bad credit’ or a bad credit history.
Some lenders refuse to offer bad credit car loans, because they believe there is an excessive risk that bad credit borrowers will not repay their loans. However, other lenders are willing to provide bad credit car loans.
Generally, these lenders charge higher interest rates for bad credit car loans than ‘prime’ car loans, reflecting the higher level of risk. Bad credit car loans may also have higher fees than prime car loans.
However, the big advantage of a bad credit car loan is that it allows borrowers with bad credit to access finance. Another advantage is that it could help bad credit borrowers improve their credit rating, assuming they make all their repayments on time.
What is a fixed-rate loan?
A fixed-rate loan is one where the interest rate remains constant for an agreed amount of time. For example, if you take out a five-year fixed-rate loan at 8.75 per cent, the lender is obliged to leave your interest rate at 8.75 per cent for at least five years. By contrast, if you take out a variable-rate loan at 8.75 per cent, the lender can change the interest rate whenever it wants.
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 a balloon payment?
Some lenders will offer borrowers reduced monthly repayments in return for a one-off lump sum – or balloon payment – that the borrower has to pay at the end of the loan. Generally, the total repayments on a loan with a balloon structure will be higher than a loan without.
Can I buy a car as a student?
Buying a car is a huge financial decision, and shy of marriage and purchasing a house (or perhaps around the world travels), it may be the biggest financial decision you make. But if you’re looking at your empty pockets, don’t despair! Your dream of owning your own car could become a reality, if you look for and compare the right car loans for your circumstances.
What is collateral?
Collateral, or security, is an asset you agree to surrender to a lender if you fail to repay a loan. Generally, the collateral for a car loan is the car itself. So if you fail to repay the loan, the lender might seize your car, sell it and then use the proceeds to recover their debt.
Can I get a car loan with poor credit?
Poor credit doesn’t necessarily mean you won’t be able to get finance for your car purchase, though your options aren’t likely to be the same as someone with good credit.
In fact, a number of specialist lenders exist offering car finance for customers with poor credit, able to provide access to bad credit car loans.
However having a history of poor credit will likely mark you as a potential risk to lenders, so your car financing needs could see higher fees and interest rates. Alternatively, consider a secured car loan, which is a type of loan that uses the car you purchase as collateral, reducing the risk.
Other options include getting someone close to act as a guarantor for your car loan, or to talk to a broker about a personalised rate specific to your circumstances.
What is a dealership?
A dealership is a car yard or a place where cars are sold.