It’s in the name, right? Well, yes – but there’s also a little more to it than you might think.
A car loan is a type of personal loan used for — you guessed it — buying a car. It allows you to shop for a car using finance instead of your savings. Handy.
But that’s not where the story stops. There’s more than one type of car loan. And there are also other ways to pay for a car when you don’t have (or don’t want to part with) the money in the bank. Let’s take a look at what is a car loan, and what isn’t.
The choice is yours Car loans are a great way to buy a car on your terms, avoiding a big lump sum upfront and spreading the cost over monthly repayments. They come in a few different shapes and sizes. Here are just a few ways to tell them apart.
New or used? You can apply for a car loan for a new, demonstration or used car. What you choose to buy may affect your loan, as a used car loan may come with extra conditions on the purchase.
How much can I borrow? In Australia, you can borrow between $2,000 and $100,000 or more across a range of loan terms, typically 3, 5 or 7 years. The loan is paid back in regular instalments (weekly, fortnightly or monthly) with interest, which may be fixed or variable across the life of the loan.
Other ways to pay The term ‘car loan’ can be a bit of a catch-all for a range of financing options. Each type of car finance has its own unique flavour.
Dealer finance: Many car dealerships offer on-site finance, taking care of everything under one roof. Sounds easy but it’s important to shop around to make sure you’re getting the best deal. You also risk the dealer marking up the cost of the car to make back any discounts they give you on the interest rates.
Chattel mortgage: Like a secured loan, you’re agreeing to put forward an asset as security for a loan. It’s an option for business owners and the self-employed and comes with some tax benefits.
Car lease: With a car lease your lender actually buys the car and you agree to make rental repayments over an agreed term. At the end of the lease, you may have an option to purchase the car outright at a reduced price or return the vehicle.
Novated lease: A novated lease is a form of a car lease that is used with salary packaging. It comes with some tax benefits as you repay costs (including both the purchase price and ongoing running costs) with your pre-tax income.
Commercial hire purchase: Similar to a car lease, except when the contract comes to an end and the total costs of the vehicle (including interest) has been repaid, you own the car. As the name suggests, it’s only available for cars used for a business purpose
Help your hip pocket with the finance know-how you need in your back pocket.
Bamboozled by finance? Asking yourself, how do car loans work? Car loan features vary across different lenders. Luckily, when you understand the building blocks of a loan, how they can be packaged and the pros and cons of each, you have everything you need to choose the right loan for you and buy that new car for a great deal. Let’s help you unravel the mystery.
Recipe for a loan So, how do car loans work? All loans are made up of the same ingredients. It’s about finding the mix that tastes good to you.
Interest rate As nice as it would be, loans aren’t free money. You need to pay them back, plus a little more to pay the lender for giving you the money. That’s the interest.
The interest rate, also known as Annual Percentage Rate (APR) or Advertised Rate, is the percentage that you’ll pay on top of the amount you borrow. It’s usually expressed as an annual rate and lenders will factor in things like your credit history, your repayment schedule, the risk (both for lending to you and how the market is going) and their underlying costs to come up with their magic number.
Most lenders have a starting point – the lowest rate they have available. This is their headline advertised rate. But that doesn’t mean they’ll offer you this rate. This low rate is usually available to only a small proportion of borrowers and may come with set conditions to qualify (e.g. a high credit rating plus homeownership).
So before you apply anywhere, it pays to do your research and get a personalised rate from a number of providers. Just make sure that the lender’s quote process is ‘credit score friendly’. That is, they only conduct a soft check on your credit file which won’t impact your credit score.
And remember, the lowest interest rate doesn’t necessarily mean the best loan. You need to consider the total cost of the loan including interest, fees and other costs to truly assess the value of any interest rate on offer.
Comparison rate Sometimes you might get a great rate, but the loan comes with whopping fees and other costs. It’s easy to get caught out if you don’t know exactly what you’ll pay. The comparison rate has you covered, as it shows the overall cost of a car loan, including the interest rate and any fees, expressed as an annual percentage. The comparison rate is usually higher than the interest rate charged on the loan.
It’s pretty important – lenders and brokers must provide a comparison rate when they advertise a car loan interest rate under the National Consumer Credit Protection Regulations.
For car loans, there is a standardised measure for how comparison rates are to be calculated and displayed:
For car loans 3 years and under, comparison rates are calculated on a $10,000 loan amount over 36 months.
For car loans 4 years and over, comparison rates are calculated on a $30,000 loan amount over 60 months
But there’s a catch – not all costs are included. To ensure you don’t get an unwelcome surprise later, you still need to factor in:
Government stamp duty and on-road costs
Late payment fees
Break costs or early termination fees
Deferred establishment fees
Broker fees (when taking out a loan through a broker, the broker's service fees are not included in the comparison rate, which can be significant)
You have your loan, you’ve bought your dream car – now it’s time to repay the money. Like most bills, a loan requires regular payments. That schedule is up to you and your lender and can be weekly, fortnightly or monthly. It’s these repayments you need to look at when it comes to managing your budget. And it’s important that the loan repayment calculations have been quoted inclusive of any ongoing fees.
Some lenders also offer a product feature called a balloon payment – a lump sum repayment you make at the end of the loan term. It can be a handy way to manage your cash flow by reducing your regular repayments. But remember, you still need to find the money for the lump sum due at the end of the loan. And you’ll also be paying interest on a higher loan balance along the way.
Upfront fees are what get you started. Also known as application or establishment fees, they’re ‘one-time’ charges at the start of a car loan. They can include:
A flat fee (e.g. $499) that applies regardless of the value of the car loan
A tiered fee (e.g. $250, $500, $750) based on the value of the car loan
A percentage fee (e.g. 3%) based on the total amount borrowed; and the credit or risk profile of the customer
A hybrid fee (e.g. $200 + 2% of the loan amount)
But it’s up to your lender if they charge any or all of these.
Here’s a quirk – establishment fees are usually capitalised to the loan. Even though they’re called ‘upfront’, that’s not when you pay them. The amount will be added to your loan, increasing your total loan amount.
Why is this important? Because you’ll be paying interest on those fees (as part of your total loan). If it’s a small upfront fee, the difference might be a few dollars on each repayment. But if it’s bigger, it quickly adds up.
Monthly or ongoing fees Also known as account keeping or loan management fees, ongoing fees are paid (usually monthly) across the life of the loan. They go straight to the lender and don’t reduce what you owe at all. Generally the lower the fees, the better. But again, it’s all relative to the total amount you repay over the life of the loan.
Brokerage fees Brokers can help you navigate the muddy waters of car finance. But they’re not a charity – they do get paid for their service and at the end of the day that’s coming out of your pocket.
In the case of car loans, the brokerage fee is often capitalised to the loan amount. This is usually in addition to the lender’s own upfront fee. They can also have commission arrangements with lenders that are either built into your interest rate or offer them a return based on the final rate you accept. So you need to weigh up if their service is worth it.
Penalty fees Life happens. When it does, make sure you don’t make a bad situation worse by being pinged with penalty fees you can’t afford.
The biggest penalty fees to look out for is the ‘default’ or missed payment fee. This fee can be charged when you make a payment late, and often occurs where there are insufficient funds in your nominated account on the day a payment is due.
Late fees vary from $10 to as much as $35, so be sure to keep an eye on your spending, always making sure you have enough in your account to pay the loan, or even set up a separate account dedicated to paying your loan. Some lenders may waive the fee if the account is brought up to date within 3 days but it’s best not to risk it.
It’s a case of buyer beware, so always take the time to read the fine print.
Early repayment fees Repaying your loan as quickly as possible is a clever strategy as it will reduce the overall amount of interest you pay on your loan. But it can come at a cost – you might get charged for your good work.
Exit fees or early repayment fees are more common with secured low-rate car loans. There are different types:
A fixed fee where the loan is repaid in full any time prior to the end of the loan term (e.g. $500)
A fixed fee where the loan is repaid in full prior to a minimum period (e.g. $250 if full repayment is made less than 2 years into a 5-year loan)
A variable fee based on the amount you would have paid in interest and fees had the loan run to full term
If you think you want to pay your loan down ahead of schedule, pick a loan with low or no early repayment fees to make sure it’s worth it.
Loan amount How much money would you like to borrow? Yep, that’s your loan amount (plus those upfront fees). It’s what you pay interest on and it’s also known as the “principal” part of your repayments.
In Australia, car loans usually range from $5,000 to $100,000, but some lenders will go higher.
When considering your loan amount, you need to factor in:
Loan to value ratio (LVR): How much you’re borrowing compared to how much your car is worth. Most car finance providers in Australia will have a maximum LVR of 140%. For different vehicles, brands, types and manufacturing years, lenders will set specific LVR thresholds.
Borrowing capacity: The maximum loan amount you may be eligible for based on your credit score, income, mortgage status and a range of other factors, including the lender’s responsible lending obligations.
It might be tempting to borrow as much as you can for that sweet set of wheels, but make sure your repayments fit within your budget.
Loan term A loan lets you spread out the cost of your car over a period of time. This time is the term of your loan. In Australia, lenders offer terms between 1 and 7 years, with 3, 5 and 7-year terms being the most common.
So, why does time matter? A longer-term loan might have a higher interest rate and the loan will cost you more overall. But when it comes to managing your budget, your monthly car loan repayment will be lower. It’s about what works for you.
Customer experience When it comes to your car loan, customer experience isn’t just the sprinkles on top, it’s the plate your dish is served on. Without it, things can get messy.
Think about how quick and easy it is to apply, get approved and manage your loan. Knowing you have a lender who cares about your experience can go a long way towards trusting you’re getting the best deal.
Anything else? The last piece of the puzzle is your car. Whatever type of car loan you’re looking at, always check for vehicle restrictions including:
The maximum age the car can be at the end of the loan term
What types of cars and vehicles can be funded (e.g. electric vehicles, utes, vans, etc.)?
Can you buy used or second-hand vehicles? If so, does it have to be through a dealer or can it be a private sale?
Should I get pre-approved for a car loan?
You might also be wondering when the best time is to think about finance. You don’t have to wait until you find a car to buy – you can actually get a pre-approved car loan.
To give a loan pre-approval, the lender follows the usual process of assessing your situation. Then when it comes time to buy, you know you’ll have enough money and it also gives you a firm budget, helping to speed up and make negotiations (particularly with dealers) smoother and easier.
Just remember, pre-approvals are only valid for a few weeks, so you need to be motivated to buy. You’ll need to make sure the car meets the conditions of the pre-approval or you will need to re-apply. Also, not all lenders offer pre-approval.
What can I use it for?
New car loan, used car loan or something else. Find your perfect match.
Looking for a car that puts the 0 in odometer? Or happy with something that’s been around the block a few times? Your choice of car can affect your choice of loan. Let’s take a look at what exactly you can use each type of loan for and what conditions come along when you choose between a new car loan and a used car loan.
For that new car smell
If you love all things shiny and new, then you’re probably eyeing off cars straight out of the factory. But a new car loan isn’t just for brand new arrivals – some lenders will let you use a new car loan for a car that is 1, 2, or even 3 years old.
You can get either a secured or unsecured new car loan as an individual Australian resident or as a business, depending on the lender. To be considered eligible for a car loan you will generally need to:
Be aged 21 or over
Be an Australian citizen or permanent resident
Be able to demonstrate a regular source of income
Have a good credit history.
For those preloved wheels
Got your eye on a car that’s too old to qualify for a new car loan? Try a used car loan instead.
A used car loan works in the same way as a new car loan. You can either apply for a loan first and get pre-approval so you know how much you have to spend on a car, or you can find the car you want and then apply for your required loan amount.
Either way, the lender will need to see all your car’s details before you can be fully approved. But they also might put extra conditions and restrictions on a used car loan, such as how old the car can be. The number of restrictions placed on your car loan also depends if you’re using the vehicle as security for your loan.
A used car loan allows you to enjoy a lower interest rate than you would receive if you were to finance through a credit card. Typically, the average interest rate of a car loan is between 5% to 17%. However, used car loans often attract lower interest rates and borrowers with a good credit rating can see their interest rates lowered to anywhere from 5% to 10%.
It’s important that you compare car loan rates in the early stages of your car hunt, as some lenders may have restrictions on vehicles that are older than 12 years at the end of the loan term. You want to get the best rate possible for a used car loan. Once you have this information, you can start to get an estimate on how much your repayments will be and if you have to pay at a fixed or variable rate.
Applying for a car loan directly online is quicker and easier than you might think. And you might be surprised at how the value stacks up. Am I eligible?
Car loan application approval odds and how much you can borrow varies from loan to loan, and lender to lender.
For starters, you will need to be:
Over 18 years of age, and in some cases over 21
An Australian citizen or permanent resident
Earning at least $25,000 per year, from a regular, proven source of income (If you are self-employed you will have to provide additional information)
The holder of a provisional or full driver’s licence
If you have existing loans or debt, there may be fewer options open to you. It’s also a good idea to check the eligibility criteria for any specific lender you are considering before submitting an official application to avoid any unnecessary negative impact to your credit score. Some lenders will have a higher salary threshold for borrowers, and make a point of only lending to those with a high credit score.
What exactly is the process?
Once you have shortlisted your preferred lenders, you can usually request a quote or rate estimate, including your estimated borrowing power, before you officially apply. This is a good idea, as this process won’t affect your credit score.
Depending on the lender, if you want to proceed, you can apply online, over the phone or in-person if the lender has physical branches. You’ll usually need to verify your identity, connect the lender to your online banking so they can verify your income and expenses and potentially provide additional information based on your car loan purpose. For example, if you are applying for a secured loan, you’ll need to provide information about the exact car you are providing as security.
If approved, you’ll then need to accept your loan agreement. The majority of car loan agreements can be signed and accepted electronically.
What documents will I need to apply?
To process your application, a lender will typically ask you to show:
Proof of identification: an Australian driver’s licence or a passport
Proof of address: copies of your recent utility bills
Verification of a stable income: payslips, bank statements or tax returns
Details of your expenses and liabilities: bank, credit card and loan statements
Plenti has a streamlined online application portal, where you can connect your bank details securely. That’s one of the ways we make applying for a loan simpler, faster and easier than ever.
What will your lender consider?
Your employment stability
Your income (e.g. salary, rent, interest, etc.)
Your expenses (e.g. mortgage, groceries, etc.)
Your repayment history on other loans
Credit agency/bureau information (credit report and score/rating)
These findings will determine if you’ll be approved, and if so then for how much you’ll be able to borrow. Often the interest rate offered will be lower if you have a good credit rating. If you’ve had problems paying your bills and debts in the past, you may only be offered a loan at higher rates.
What is my Credit Score?
Based on the information in your credit report, your credit score, or rating, is a single number that sums up how trustworthy you are as a borrower. Credit scores are typically on a scale of 0 – 1,200 or 0 – 1,000 depending on the credit agency. The higher your credit score, the more ‘reliable’ you are perceived to be and the greater the likelihood of your loan being approved, at a lower interest rate.
Now that the industry uses comprehensive credit reporting (CCR), credit reports are more detailed so that lenders have a better picture of both the positives and negatives.
To calculate your credit score, credit agencies will assess:
How much money you’ve borrowed in the past
How much credit you currently have
How many, and what type of credit applications, you’ve made (This can now include payday loans and buy-now-pay-later services such as AfterPay)
Whether you usually pay your bills and loan repayments on time
Any loan defaults
Any court judgments
Information from your bank, telco, insurance and utility companies
Your age, address and employment situation
Up to two years of your general financial history
You can request your report and rating/score from credit rating agencies before you go through with a loan application. This does not usually impact your credit score. Be aware that because there are multiple credit agencies, the information your lender uses may not be exactly the same.
Get a free credit check from one of Australia’s major credit rating agencies: Equifax, Experian or Illion.
How do I improve my chances of getting approved? Applying for a car loan has the potential to impact your credit score, particularly if your application is declined. Therefore, it’s important that you put your best foot forward before beginning the application process. We’ve assembled a useful selection of tips to help you submit a strong loan application.
Make sure you pay your existing debts on time. Did you know that repayments that are more than 14 days late may be recorded on your credit file? While less serious than a default, a series of late repayments can have an equally negative impact on your credit score. Making late repayments also sends a bad message to a prospective lender and may result in you paying higher interest rates.
If you do ever find yourself behind on your repayments, it’s important you contact your lender directly. Working with your lender toward a mutually beneficial outcome can help to protect your credit score. Remember, it’s far easier to protect a good credit score than it is to improve a weak one.
Only request as much as you need to borrow. When assessing your application, a lender will look at whether you can service a loan. Essentially, this evaluates whether, after all your expenses, you have income left over to meet the repayments of your proposed loan.
If you request an amount that is more than your finances say you are able to repay, it’s highly unlikely you will get approved. In some cases, a lender may offer you a longer car loan term to reduce your repayments, but it’s best to do your homework first. Use a repayment calculator and budget to figure out what you can reasonably afford.
Review your credit history. Australia has three main credit bureaus, Equifax, Illion, and Experian. You can request a free copy of your credit score once a year. Once you’ve verified your identity (i.e. with a driver’s license, passport etc.) the bureau is required to provide you with your credit report within 10 days. Your credit report will provide an overview of your credit history, including previous loans, existing debts, and your performance as a borrower.
You should ensure all the information contained in your credit report is accurate, and if not, contact the bureau to have it remedied. This will have a direct impact on your credit score. If you’re unsure of how to interpret your credit score, see this ASIC guide.
Pay down existing debts. Lenders may look unfavourably on an application for individuals with large amounts of debt, particularly if the debts are already at the limits of what you can afford. It’s important to demonstrate a concerted effort to repay your existing debts to a reasonable level.
This applies even if your personal loan is for the purpose of consolidating your debt. While a move to lower interest rates makes sense, it may be hard to get approved without opening up some additional capacity between your income and expenses.
Minimise your credit card balance. Using a credit card can be a great way to help boost your credit rating by demonstrating you are financially responsible. However, you need to manage your credit card carefully to ensure your balance is consistently low.
Failure to make repayments can have an equally negative impact on your credit score. Finally, lenders are now required to assess your application based on your credit card limits, not the outstanding balance. If you have unused cards or excess limits, look into reducing them before you apply for a new loan.
Within the advertised range, most lenders apply loan capping rules. This means they adjust the maximum loan amount you may be eligible for based on your credit score, income, mortgage status and a range of other factors. This maximum loan eligibility will usually be communicated to you when you get an initial quote or rate estimate from a lender.
Even once you have applied with a lender for a specific loan amount, they may come back to you with a ‘counter-offer’. A ‘counter-offer’ is a conditional approval based on a loan amount that is lower than the amount you’ve requested but one the lender believes you can afford and meets their responsible lending requirements. Whilst it may be tempting to borrow as much as you can, make sure your repayments will be realistic to make within your budget. This will be a significant factor in determining whether your loan will be approved.
At Plenti, we assess your loan application in line with our credit criteria and our responsible lending obligations. Whilst no guarantee, following the tips above will go a long way to improving the prospect of successful loan approval.
How long will it take to get approved? At Plenti, once your car loan application is approved (and you have accepted your loan contract) your funds are transferred into your account the following business day.
The funds will be transferred into the same account that you have nominated for your direct debits.
Buying a car with finance? You’ll need to decide if you want it to be a secured car loan or unsecured car loan.
Borrowing money to buy a car is a managed risk – for both you and the lender. That’s why lenders offer different two basic types of loans – a secured car loan and an unsecured car loan. Which one you choose can affect how much you’ll be paying and the interest rate you’ll be charged. Let’s take a closer look at the type of loan that might be right for you.
What is a secured car loan? With a secured car loan, you put your money where your motor vehicle is. That is, the loan is secured against the car you’re buying. So if you fail to make your repayments, the lender can sell your car to recoup its money. It’s a lender's way of knowing they won’t lose out if things go south – they have a security blanket.
But they’re usually only available for newer vehicle models since they’re more valuable as an asset – typically for a car that’s less than 7 years old with a market value of at least $10,000.
Given that the loan is secured by the value of your vehicle, your lender will ask you to confirm the value of the asset and ensure that its value is protected. You will be asked to do this by:
Informing your lender of your new vehicles chassis number, vehicle identification number (VIN), registration number, model & make, year, and colour
Providing the lender with a copy of your car registration papers
Getting a vehicle inspection (if through a private sale)
What you get Having security (also known as collateral) means that the lender can offer a lower interest rate for the loan. This can help you save on your repayments, borrow a greater amount or even extend the repayment period longer.
A secured car loan generally comes with a fixed interest rate, meaning you have the certainty of knowing how much your repayments will be over the life of the loan.
What is an unsecured car loan? An unsecured car loan is all about trust (and good judgement). There’s no asset put up as collateral, so a lender will decide whether or not to give you a loan based solely on how creditworthy you are. If you fail to make repayments or defaults on your loan, the lender must sue you to get back what you owe them.
They’re riskier for the lender, so they usually come with a higher interest rate. You’ll also likely face stricter eligibility requirements including a good credit score history.If you’re looking to borrow a smaller amount for a new or old car and know that you’re able to make the repayments, then an unsecured loan might be for you. It might be your only option if you’re buying an older car or one that’s worth less than the value of the loan.
What you get Unsecured loans generally have shorter loan terms (up to 5 years) and a lower maximum loan amount (up to $50,000). But on the upside, there are fewer restrictions on how you spend the loan funds. So you may buy a vehicle of your choice, regardless of age. You also have the flexibility to use your loan to pay for other costs associated with buying a car, including:
A pre-paid maintenance agreement
But what about fixed and variable-rate car loans? When it comes to car loan repayments, you might also have a choice – either a fixed (set) or variable (changing) interest rate.
When it varies With a variable-rate car loan, the interest rate can change up or down across the life of the loan. They bob with the tide, so when rates go up so will your repayments, and when rates go down, your repayments will too.
But no one has a crystal ball. So if you’re considering a variable-rate car loan, factor a buffer into your budget, so you don’t feel the pinch of higher repayments if rates do go up.
Fix it When you take out a fixed-rate car loan, the interest rate is locked in for the term of the loan. They often have higher interest rates than what’s been offered for variable loans. But they give you certainty and help you manage your money because your repayments will stay the same. And if the market does shoot up, you’re protected.
But remember, you may have less flexibility and freedom to make early repayments with a fixed rate, depending on your lender. Although many online car loan providers offer no early repayment fees regardless of whether your loan is fixed or variable. Make sure you check with your lender before you lock it in.
Pros and cons of each loan type:
Why choose a secured car loan? + Lower rates + Good if you want to buy a new or used car under 7 years old + Borrowing potential increased + Longer terms available - Can take longer to approve - More restrictions on what you can buy - You can’t use it for other costs (aftermarket upgrades, repairs etc)
Why choose an unsecured car loan? + Greater freedom for what car you can buy + You can use it for other costs (insurance, registration, etc) + Quick application process - Higher rates - Less borrowing potential - Shorter loan terms
Why choose a variable-rate car loan?
+ Usually more flexibility to repay your loan early + You’ll benefit from lower repayments if interest rates go down + Rates are competitive - A rate increase will result in higher repayments - Budgeting is harder
Why choose a fixed-rate car loan? + Know what your repayments will be for the life of the loan + Easier to budget - More likely to have early repayment fees - May be less flexible depending on the provider
When it comes to choosing which loan type is right for you, ask yourself:
What’s the interest rate like? Before choosing your loan type, you should compare car loan rates to find the lowest possible rate available
Do you prefer a fixed or variable rate?
Can you realistically make repayments on time?
What is the length of the loan?
Buying a car is a big financial commitment, and it’s important to not only factor in the price of the vehicle being purchased but also the fees that come with a car loan.
Just as everyone’s taste in vehicles is different, there is no one-size-fits-all when it comes to car loans. While not quite as much fun as a test drive, you do need to do your homework to find the one best suited to your needs.
How can you decide which is right for you? You will first need to make a few key decisions. Planning and considering your situation upfront will help when comparing what car loan products are going to be the right match, and offer you the best value.
1. Loan amount: How much do you really need? To decide how much you need to borrow, do some research and budgeting to work out how much (approximately) you are going to need for your next car. It’s smart to only borrow what you really need, rather than all that may be offered to you by a lender. Remember, when you borrow money to pay for something, the actual ‘cost’ of that item becomes much higher when you factor in the cost of the loan.
For example, if you borrow $20,000 to buy a vehicle with a 5-year Unsecured Loan and a fixed interest rate of 12.50%, once you factor in interest and fees that car may actually cost you around $27,417.
2. Repayments: How much can you afford to repay? Look at your everyday budget, or create one, to see how much you can realistically afford to put towards car loan repayments. It’s always good to give yourself a buffer; failure to make a repayment at any time can cost you a lot in fees. Of course, it isn’t good for your credit rating either. Are you expecting any major expenses or changes in income in the next few years, changing where or how much you work or perhaps hoping to have a baby? Be sure to build this in.
Whether you receive your income weekly, fortnightly or monthly, you need to know how much you have leftover at the end of each pay period and how this will align with your repayments. This is to ensure there are no missed payment surprises. It may be worth opening a separate bank account for your repayments and transferring these funds in on payday so you are never caught out.
3. Loan term: How long will you need to repay? Divide the total amount of your ideal car loan amount by your planned monthly repayment to get a ballpark amount of time you’ll need to repay the loan. For example, Jo wanted to borrow $24,000 to pay for a larger work vehicle. Based on his salary and existing expenses, he thought $120 per week / $480 per month would be an affordable repayment. This would be $5,760 per year, meaning in 5 years he’d have paid $28,800 — roughly the full amount, accounting for interest and charges.
A longer-term loan might seem attractive as it means lower monthly repayments, however, the overall (lifetime) cost of the loan is significantly higher because you’ll pay more in interest, and potential fees. That being said, provided you look for a loan with flexible repayments, you’ll be able to take advantage of any future increases in salary that may allow you to pay down your loan faster without penalty.
4. Loan type: Decide between a secured or unsecured loan Do you have an asset that you are willing, or able, to put up as security against the loan? Perhaps property, or the new car you’re planning to purchase itself? If you are confident in your ability to repay the loan, then a secured loan will get you a better rate and may unlock access to greater funds. The newer the car, the lower your rate will be.
Be aware however that your asset will be at risk if you can’t make the repayments, and not all cars are suitable as a secured loan asset.
5. Compare: Start to request and examine your personalised offers Now you know roughly how much you need to borrow, what you can afford as a repayment and how long you’ll need to repay your car loan. Next, you can start to plug these values directly into lender or comparison sites to get an estimate of your personalised interest rate and repayments.
Experiment with different combinations, such as different loan terms or repayment amounts, and match them against your needs. Need more help deciding? There are many third-party agencies (that don’t sell loans) that rate and compare a broad range of loans.
Canstar is one of the most established financial comparison sites, and they’ve been comparing products without bias since 1992. They release annual star-ratings for a range of personal loans from many providers.
To do this, Canstar comprehensively and rigorously examines a broad range of loans available across Australia. To come up with an overall score, they award points for:
Price — comparative pricing factoring in interest and fees.
Features — like the complexity of the application, the time involved before settlement, product management, customer service and loan closure.
These are then aggregated and weighted to produce a total score. This means Canstar’s ratings are reputable and transparent, so you can trust the information they provide, but still dig deeper if you want to.
Other comparison sites can also be useful, however, you should always check around, as some may have a ‘sales’ element — that is they may receive money for the people that visit their website en route to a particular lender. So if the best rate isn’t offered it may not show up on their comparison.
They also have ‘promoted’ or ‘featured’ loans, which they are paid to highlight, even if those loans do not truly reflect the best value car loans on the market.
Another way to get information on your lender and loan is to read feedback from real,verified customers’ on ProductReview.com.au.
What questions should I ask to choose a car loan?
Here’s a useful checklist to be confident you understand your loan.
What is the interest rate and the comparison rate?
How do these rates compare to other car loans?
What are the fees and charges? (e.g. upfront, ongoing, early exit)
What are the terms and conditions? Do the car loan term and loan amount fit your needs?
Can you afford the repayments?
Are you comfortable with the lender? Have you checked its reputation and accreditation?
Comparison rates are a good starting point, but you still need to decide what will work best for you. The costs involved are a major factor, but once you have shortlisted a few loans with similar costs, make time for these final checks:
Are there flexible repayment options? Usually, you can choose between weekly, fortnightly or monthly repayments according to what suits your pay cycle. However, not all lenders offer this. It may matter to you, it may not.
Compare a car loan’s conditions and fees around making extra repayments and paying the loan off before the end of the term. This can be a great way to reduce the overall cost of your car loan - but not if you’ll incur extra penalties.
Can you use the funds for the car you plan to buy? You can’t always use the borrowed money for whatever you like. For example, if you are taking out a secured car loan, you’ll only be able to spend the loan funds on a vehicle that meets the lender’s criteria. These criteria can mean the vehicle needs to be brand new, and perhaps newer than the car you may be planning to buy. Some lenders don’t allow you to take out a car loan for business purposes. Do make sure your purchase plans match the lender's policies.
What are the options for managing the car loan over time? Check and compare how easy the loan will be to manage with regard to repayments, your personal details, any refinancing down the track. The option to manage your account online is often available, but not always, and some lenders have more functionality than others. Using direct debit for repayments is common, yet without it, monthly repayments will be much less convenient and you are more likely to be penalised for late payments if you aren’t perfectly disciplined.
With this homework under your belt, you’re well on the way to being able to compare a range of loans out there, so you can feel confident you’re choosing the right one for you.