What is a car loan?

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  

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