Car Loans

What is a car loan?

A car loan is a type of personal loan used for the purpose of buying a new or used car. It allows you to shop for a car using finance instead of your savings.

Car loans are a common type of personal loan. When you take one on, your lender purchases the car for you and allows you to pay it back over a period of years. Essentially, the lender gives you the service of using their money, and in exchange, you compensate the lender for their services by paying interest on the loan amount.

Most car loans use simple interest that is calculated only on the principal (i.e. the amount owed on the loan). Simple interest does not compound on interest, which will save you money as a borrower.

If you’re considering a car loan for your next vehicle purchase, it pays to check your credit score first. If you have a low credit score, you could be stung with higher interest rates so it may be worth working on improving your score before you buy.

It’s also important to determine how much you need to spend on your car. A go-to-rule is to spend no more than 35% of your annual income. Making sure you choose a loan you can afford and that has the flexibility to meet your needs will be an important consideration for any lender when considering whether to approve your application.

Getting a new car loan?

As is the case for any type of personal loan, getting a new car loan involves borrowing a set amount of funds to purchase a new car and then paying that money back over an agreed period time with interest, which may be fixed or variable percentage.

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

Compared to dealer finance, getting a new car loan directly from a lender offers several advantages, such as:

  • Lower interest rates. For example, a new car loan with Plenti has an annual rate starting from just 4.69% per annum
  • More financing options. Shopping around will help you find a loan with features that are the best fit for you. For example, Plenti car loans have no early repayment fees, giving you the flexibility to pay off your loan early and save on interest
  • Better bargaining power. Arriving at the dealer with pre-approved finance and a fixed budget will allow you to negotiate directly on the car you are looking to purchase.

Repayment flexibility differs between lenders but you can normally select weekly, fortnightly or monthly repayments.

At Plenti, our secured car loans come with flexible repayment options from 3, 5 or 7 years for amounts between $10,000 and $100,000 and no ongoing or early repayment fees.

What if I’m considering a used car?

A pre-owned vehicle can make a good choice if you need a first or next car. You can get a good deal because you’re not buying it brand new and there can be more room to negotiate if you opt for a private sale. If you don’t have the right amount available, used car loans come with plenty of flexibility.

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 vehicle or you can find the vehicle you want and then apply for your required loan amount.

Either way, the lender will need to see all the vehicle’s details before you can be fully approved. Lenders may have restrictions on vehicles that will be over 12 years old at the end of the loan term.

At Plenti, we offer a complete online solution for managing used and private car sales. This includes managing your application, verifying borrower and seller identity, verifying insurance cover, facilitating vehicle checks and settling your loan. All from a simple mobile interface.

What is a secured car loan?

If you’re buying a car that’s less than seven years old and the market value of the car is at least $10,000 (although this may be lower with some lenders), you may be eligible for a secured car loan. Secured car loans generally come with a fixed interest rate, meaning that you’ll always know how much your repayments will be over the life of the loan.

With a secured car loan, you provide the lender with rights over an asset, in this case, your vehicle (this may be in the form of a charge, mortgage or caveat). These rights ensure that should you fail to make your loan repayments, the lender can take possession of your car, sell it and recoup the outstanding debt. This means more security for your lender and a lower interest rate for you.

The advantage for you is a lower interest rate than other loan types and more money available to you (for example $100,000 versus $50,000 with an unsecured personal loan). The disadvantage, however, is a more complicated application process, restrictions on the type, model and year of the vehicle you buy, and of course, the risk of repossession.

What is an unsecured car loan?

An unsecured car loan is a loan that’s issued and supported only by the borrower’s creditworthiness, rather than any type of collateral. Sometimes referred to as “signature loans”, unsecured loans are approved without the use of property or other assets and are therefore riskier for lenders. As a result, unsecured loans typically come with higher interest rates than secured loans.

The terms of an unsecured car loan can vary and is contingent on the borrower’s credit score. In general, borrowers require a high credit score to be approved for an unsecured loan with low-rates. The lower your credit score the higher the interest rate you will likely have to pay. In some instances, lenders will allow loan applicants with insufficient credit to provide a guarantor, who can take on the legal obligation to fulfil a debt should the borrower default.

How does car refinancing work?

If you feel like you’re paying too much for your car loan, refinancing can help save you money. If interest rates have dropped or your credit rating has improved since you received your car loan, it’s worth looking at refinancing.

Refinancing is the process of taking out a new loan to repay an existing loan. It’s usually carried out after a change in personal or financial situation, to consolidate debt, or simply because a better deal is being sought. Refinancing can be a smart way to manage your money and while it can be with the same lender, it’s common to switch providers.

To refinance your car loan, you simply need to get approval for a new loan that covers the amount of your outstanding debt. You use the funds from the new loan (with a lower interest rate or better terms) to pay off your existing car loan.

Sebastian Paulin

Written By Sebastian Paulin

Sebastian has worked with Australia’s leading banks and fintechs for over 12 years building better consumer experiences.

FinTech & Consumer Finance Author

Frequently Asked Questions

Are car loans secured or unsecured?

Most car loans are secured but the past decade has seen a massive increase in the number of car shoppers taking out unsecured car loans. This is largely the result of convenient online or mobile lenders and the flexibility that an unsecured loan can offer.

If you’re a reliable borrower and don’t want to use the vehicle you’re buying as collateral, an unsecured loan can offer a range of benefits. As there is no collateral, if you default on your loan repayments your lender cannot repossess the vehicle you have purchased with the loan.

Whether you take out a secured or unsecured loan with fixed or variable rates is up to you. To help choose, ask yourself these questions:

  • What’s the interest rate like?
  • Do I want a fixed or variable rate?
  • What’s the length of the loan? 
  • Can I pay back the loan in a shorter time frame?
  • What vehicle am I planning on buying? 

The price of your car will be a major factor in your decision to take out a secured or unsecured loan. For example, if you’re looking at purchasing an upmarket car, you’ll likely have to borrow more. This will affect things like how long it takes to repay the loan and the interest that you’ll accumulate.

What is a car loan pre-approval?

Having a car loan pre-approval can help you speed up the process of buying a new or used vehicle. Getting pre-approved will help you understand exactly how much you can borrow and takes the pressure off the shopping process because the finance component has been covered. Being aware of your budget limitations can also help you negotiate a better deal.

Buying a car, while exciting, can be a stressful time. Sorting out the finances before you shop can help eliminate some of this stress. Similar to other loan application processes, the lender will evaluate your circumstances to ascertain how much you can afford to borrow. This can stop you shopping for something you can’t afford.

As a guide, your purchase price should be less than what you’re actually approved for because you’ll need to reserve about 10% of the loan amount for taxes and fees. You’ll also want to consider down payment and trade-in amounts that could offset the purchase price.

Pre-approval doesn’t mean the loan is a guarantee, but it does offer some clarity. Once you’ve chosen the vehicle you’d like to purchase you simply resubmit your car loan application with the new details and wait for unconditional approval. This means the lender is prepared to give you a loan for the specific amount requested.

Can I get a loan on a pre-owned car?

If you don’t have enough money saved to purchase your dream second-hand vehicle, a used car loan could be the way to go. Used car loans are personal loans used to finance the purchase of a second-hand vehicle.

Similar to new car loans and personal loans, used car loans involve borrowing a set amount of money and then paying it back with interest over an agreed amount of time. The loan term and the interest rate will vary.

A ‘used’ car is technically defined as any vehicle that has been previously registered in Australia. Buying a used car allows you to keep the cost of the vehicle down by avoiding high depreciation costs. The moment you drive a new car out of a dealership you can lose thousands of dollars in market value.

Used car loans can be secured or unsecured and have either fixed or variable rates. Some lenders will only offer loans on used cars up to a certain age, as they consider older cars too risky to finance. Other lenders may consider offering a loan on an older vehicle if they are seen to hold their value.

What is the best car loan?

Finding the best car loan is all about understanding your needs. Everyone’s financial situation is different, so there’s no one “best car loan” to cover every possible need. Knowing what sort of car you would like to buy and how much it costs will help you to consider how much you need to borrow and what sort of loan will be best.

How much you can borrow depends on your income, your expenses, your assets and any other debts you might hold. Your credit history is relevant too, determining 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 you. They could also refuse you a loan or apply higher interest rates to cover the risk.

When comparing car loans, make sure you are comparing apples with apples. Secured car loans must be compared with secured car loans and unsecured car loans must be compared with unsecured car loans. Consider interest rates, applicable fees, loan features and lender reputation. Think about flexibility and what that means for you. A car loan which allows extra repayments, for example, enables you to pay off your loan ahead of schedule and to minimise interest costs. A loan with a redraw facility allows you to “borrow back” extra repayments. Such flexibility can save you time and money in the future.