A guide to car loans in Australia
Before you finance your motor vehicle purchase, it’s critical to educate yourself on the ins-and-outs of car finance. This ensures you get the best car credit deal possible. So, how do car loans work and what’s the best way to find your ideal car loan? Here’s the full-info guide from BestFind.
What is a car loan?
A car loan is a customised personal loan that provides the lump sum needed to buy a new or used vehicle. It can be the perfect funding solution for situations when the vehicle’s asking price is higher than your savings. The finance arrangement between you and the lender will generally involve the following:
Amounts: You can borrow a minimum of $2,000 up to a maximum of $250,000. Typically, a high income and a high credit score will boost your borrowing capacity. You can also borrow more if you have a considerable number of assets, fewer expenses, and fewer debts. However, it’s important to remember that a high amount of debt also has increased costs.
Terms: Paying off your debt can take one to ten years, depending on your choice and the lender’s limits. Generally, a longer term has lower repayments but will cost more because interest is applied over a longer period. Similarly, a shorter term carries higher repayments, but you keep more money in your pocket in the long run.
Interest rate: Borrowing money to buy your next set of wheels comes at a cost, which is the interest rate. It’s a percentage that gets applied to your debt while you pay it off. Car loan interest rates typically range from 3% up to 15%.
Repayments: You agree to repay the lender the total sum owed (interest and fees included). Use BestFind’s car loan repayment calculator to find suitable monthly repayments for different scenarios.
Balloon payment options for car loans
In addition to the features mentioned above, auto loans may also have a balloon payment option. A balloon payment or residual value is a lump sum scheduled for payment at the end of your term. This amount is significantly larger than your regular repayments. Typically, it can make up about 20 – 50% of your total costs.
- Pros of balloon payments. They reduce your monthly payments, leaving you with more disposable income. Usually, there’s enough time to save for the balloon payment. Alternatively, you can choose other options such as refinancing when the payment is finally due.
- Cons of balloon payments. They may increase overall costs. You may also find it difficult to come up with the required lump sum.
What are the fees and charges associated with car loans?
Your auto loan will also have additional fees and charges added, aside from interest. These may include:
- Application fee – typically paid upfront, when you apply.
- Establishment fees – the amount you pay for processing after your application approval.
- Ongoing fees – covers account-keeping services.
- Penalty fees – for early or late repayments.
- Direct debit fees – applies when you are using direct debit service to make car loan repayments.
- Redraw fees – charged if there’s a redraw facility and you want to access extra repayments you have made.
Car loans in Australia – How they work in 5 steps
These five steps generally act as a bridging gap between you and your new acquisition:
- Shop for the right car: Visit car dealerships and auctions, or browse online marketplaces to look for private sellers.
- Discover the available options: Shop around and compare car loans to find the best choice for your particular circumstances.
- Make your application: Provide the lender with the information and documentation they need to lend you money.
- Obtain a purchase agreement after approval: The lender will usually ask for the sales contract between you and the vendor.
- The lender pays the required lump sum: Once the vendor receives money, you collect your car and start driving!
What are the available types of car loans in Australia?
Aussie borrowers have unique needs and objectives. Chances are, you want financing that fully delivers on your brand of needs. Luckily, there are many credit options to choose from, based on a variety of factors. We have covered them below so you can enjoy great flexibility when making your choice:
Secured vs unsecured
Secured car loan
For secured loans, the acquired asset acts as collateral. The lender can therefore sell the vehicle to recover the amount owed if you fail to make repayments.
- Pros. Low interest rates since there’s less risk to the lender.
- Cons. More restrictions regarding the type of car and its condition. Also, the borrowed amount is usually tied to the value of the vehicle. Therefore, you may not get extra funds for related expenses like insurance.
Unsecured car loan
An unsecured loan has no collateral to back it. Consequently, the lender can’t repossess or sell the vehicle if you fail to repay.
- Pros. More flexibility in terms of what you can buy and how much you can borrow.
- Cons. Higher interest rates since there’s a greater risk to the lender.
Fixed interest rate vs variable interest rate
Fixed interest rate car loan
With a fixed-rate car loan, your interest rate is locked until you finish repayments.
- Pros. Fixed repayments ensure a consistent budget and less stress from unexpected increases.
- Cons. A locked rate means you also can’t benefit or save when there’s a dip in market rates.
Variable interest rate car loan
Variable rates are linked to market rates which may shift up and down at any point of your term.
- Pros. A fall in market rates may also lower your payments, which means you get to save.
- Cons. If market rates spike, increased repayments can tighten your budget.
New vehicle finance vs used vehicle finance
New car loans
You can use a new car loan to buy a brand-new ride, or a vehicle less than three years old.
- Pros. Financing a new vehicle is generally easier. Most new car loans are secured, and you might get a lower interest rate if the vehicle has a high value.
- Cons. A brand-new vehicle is usually costly. Furthermore, it immediately starts losing value once you use it.
Used car loans
You can use a used car loan to buy a pre-loved auto that’s older than three years. Other than that, it works similarly to a new car loan.
- Pros. Second-hand vehicle financing is generally more affordable.
- Cons. Some lenders will not finance specific models or vehicles above a certain age.
Low-interest finance vs bad credit finance
Low-interest car loans
A low-interest car loan potentially offers thousands of dollars in savings to borrowers with a high credit score. A high credit rating usually results from making repayments on time. If your credit history shows good behaviour, the lender is more willing to offer competitive rates. Other factors such as a high-income level and fewer expenses and debts also increase your creditworthiness.
Bad credit car loans
If your credit score needs patching up, you can still apply for a bad credit car loan. The downside is that this alternative comes with higher interest rates and higher fees. That’s because the lender will want to protect themselves, especially if your credit history shows recent defaults. To increase the likelihood of approval, consider applying for a secured loan. Likewise, you can add a suitable co-signer to reinforce your application.
Car loans for specific individuals
- Students – Some lenders offer specialised car loans for students. Others offer guaranteed or co-signed auto loans for students who still need to build their credit score.
- Uber drivers – Uber does not currently offer auto finance. But, if you want to explore this stream of income, some banks provide credit for Uber-approved vehicles.
- Business owners – There are a variety of options for financing a business vehicle. These include customised lease arrangements and repayment plans that offer potential tax benefits.
- Pensioners – If you meet the lender’s requirements, there are specialist auto loans for pensioners. This option could also be available for people who receive Centrelink pensions.
- 457 visa holders – Non-resident car loans are also available for 457 visa holders. However, the person has to meet specific requirements. For instance, they must be able to pay off the loan before their visa expires.
Car loans for buying a specific motor vehicle
- Standard cars – Finance option for a wide range of vehicle types, for example, compact cars, sedans, and SUVs.
- Motorbike – Explore the thrill of riding in the open air, minus the full, upfront costs involved.
- Boats – Go where the water takes you with an affordable boat loan. Pay it back over time while you enjoy one of the most exciting recreational activities.
- Jet skis – If you’re a water-sports lover, you can ride the waves with a top-of-the-range jet ski.
- Trucks – From small trucks to heavy-duty trucks – you can make a large purchase that won’t weigh on your pocket.
- Caravans – Buy your caravan via flexible repayments, and get open road fun, adventures, plus quality family time in one package.
- Equipment – Set up smooth business operations with the right kind of modern equipment. You have a wide range of options, from medical equipment to earthmoving equipment, gym equipment, and IT equipment.
- Classic cars – Enjoy the historical experience of driving a unique classic or vintage car which could appreciate in value.
Car loans for different finance arrangements
Standard car loan
A simple arrangement where the lender bestows you the money you need to buy a new or used auto. You then make smaller repayments that include interest and fees.
- Pros. Flexible repayment terms that are easier on your budget than a full-price purchase.
- Cons. You need a good or excellent credit score to get the best car loan rates.
Chattel Mortgage
A chattel mortgage works like a secured loan, but it’s specialised for business purposes.
- Pros. Potential tax benefits that can boost your savings.
- Cons. Non-payment means your business risks losing the asset.
Commercial hire-purchase
A commercial hire-purchase is a rental agreement between the lender and an individual or a business. The lender buys and owns the vehicle, and you pay rent to use it. You only take full ownership of the asset at the end of the finance agreement.
- Pros. You enjoy the full use of a high-cost asset without sacrificing a large sum of money all at once. This option also offers tax benefits for businesses.
- Cons. Vehicles depreciate as you use them. When the agreement ends, your vehicle may not have any significant value. Hence, you wind up paying more than the vehicle’s worth.
Operating lease
This alternative gives your business unrestricted use of a vehicle without the burden of ownership. Instead, you pay rentals, and after the loan term ends, you return the vehicle or enter into a fresh lease.
- Pros. Tax-deductible rental payments reduce costs for businesses. Plus, there are no worries about depreciation.
- Cons. Renting may be more costly than purchasing the asset.
Finance/Car lease
A car lease or finance lease closely resembles how operational leases work. The only difference is after the rental agreement ends, you also have the option of making a residual payment. This enables you to buy the vehicle instead of returning it or renewing the lease.
- Pros. Great flexibility when it comes to choosing your loan term and making repayments.
- Cons. You can’t make any unapproved changes to the vehicle without ownership rights. Secondly, the residual value may be costly. That means you have to pay more than the vehicle’s worth if you want to own it.
Novated lease
This agreement involves three parties – you, your employer, and the lease provider. Your employer deducts repayments from your pre-tax salary in order to pay the lender.
- Pros. You can use the vehicle solely for personal purposes with the option of buying it when the lease ends. Secondly, you save a lot of money on income tax through salary sacrifice. Lastly, your employer benefits by offering an incentive that motivates employees at no extra cost to the company.
- Cons. You may lose the vehicle if you’re unable to make repayments. This can happen because of job loss or change of employment.
Other types of car loans
Dealer finance
Dealer finance offers you a suitable vehicle to buy and finance to make the purchase, all in one package. Most dealers work with a lender to arrange finance for you, while others finance the asset directly.
- Pros. Less paperwork involved. It also saves time since you don’t have to search for a suitable financial institution. You also have the option to trade-in your current vehicle as part of the deal.
- Cons. Limited choice of vehicles. Additionally, most dealerships will require a deposit or balloon payment to finance your vehicle.
Private sale car loans
Private sale loans are a huge favourite among Aussies. This option allows you to buy a vehicle from private vendors found via online sites like Gumtree or Facebook Marketplace.
- Pros. Cheaper than buying from a dealership since there are no fees or premiums involved.
- Cons. Lenders may have stricter requirements when financing a private sale. You’re also responsible for ensuring the vehicle conforms to these requirements. Furthermore, privately bought vehicles usually have no warranty or guarantee.
Pre-approved car loans
A pre-approval conditionally offers you money before you decide which vehicle to buy.
- Pros. It’s easy to go car shopping since you already know what you can afford. In addition, you have more negotiating power.
- Cons. They may not be easy to find. If you do qualify, you only have a limited time to find your dream ride.
Low doc car loans
Most financial institutions require you to submit many documents before deciding whether to make you an offer. Low doc loans are a refreshing alternative with much less paperwork involved.
- Pros. Convenient for self-employed borrowers who don’t meet general lender requirements.
- Cons. The lender is likely to charge a higher interest rate if there’s more risk involved.
No-deposit car loans
As the name suggests, applying for a no-deposit car loan means your savings won’t be required.
- Pros. You can buy a vehicle with no initial contribution from your pocket.
- Cons. The option may not be available for second-hand autos above a certain age. If you have bad credit or poor credit history, you might also not qualify.
Car loans comparison – How to find the best car loan rates and deals
When done right, a car loan comparison will help you pin down a finance solution with extra-friendly and convenient terms. If you’re using our comparison table to exercise due diligence, remember to apply the right filter. You’ll also find the following checklist valuable as you figure out the best fit for your needs:
- Interest rate. The advertised rate is an all-important factor that can make or break the bank when it comes to repayment. Search for the best car loan rates available for your credit score and circumstances. Also, don’t forget to check the comparison rate. This percentage includes other fees and charges for your debt on top of the interest rate. It will, therefore, show you a loan’s true colours in terms of cost.
- Repayment plan. You should look for maximum flexibility when repaying your debt. In a best-case scenario, this involves being able to set convenient due dates for payments. Also, check for the ability to make additional repayments without getting charged more fees.
- Loan requirements and restrictions. Does the lender require a deposit, balloon payment, or comprehensive insurance? Are you allowed to choose the right amount and term? Does the vehicle you want to buy fit into the loan’s restrictions or requirements? Asking these questions helps to optimise your search.
- Unique features. Which option offers more advantages in your situation? It could be one with a redraw facility that gives you back any extra repayments for emergencies. Or, it could be a lender that offers pre-approval. You can then refine your search for the perfect motor vehicle.
What you need to apply for a car loan
To qualify for a car loan, general requirements state that you must be at least 18 years or 21 years. Credit providers will also require all or some of the following:
- Identification information – Australian ID, passport, Medicare card, or valid documentation for non-citizens.
- Proof of income – Payslips, bank statements, and any details about pensions, allowances, and other sources of income.
- Details about your asset and liabilities – This includes shares, cash savings, bonds, and property. It also covers credit card debt and information about your expenses.
- Vehicle details. If the loan is secured, the lender will need to know the vehicle’s registration and engine number. They’ll also want to see the purchase agreement between you and the vendor.
- Proof of residence – This can be a utility bill or mortgage document with your name on it.
- Valid Australian driver’s licence.
How to apply for vehicle finance online
- For a recap of what we have covered in this guide, understand how car loans work. Next, know the available types before you compare loans.
- During your comparison, look for the best rates and other suitable loan features. Our comparison website provides useful tools that’ll help fast track your search.
- Check requirements and make sure you have the right documents and information in place before you apply.
- To apply, locate the right “Go to Site” button and visit the lender’s website with one click.
- Once you submit your application, getting a response generally takes 24 hours up to a week.
Frequently asked questions
Do I qualify for a car loan?
Lenders generally look for applicants with a regular income and a sufficiently high credit score. If you meet these requirements to some degree and can convince the lender of your ability to repay, then you have a better chance of qualifying.
Where can I get a car loan in Australia?
If you’re looking for a convenient place to start your search, check out our product table. There you’ll find our handy selection of authorised Australian lenders.
Will the application lower my credit score?
Any loan application you make will show up in your credit report. A single application may not significantly impact your score, but it will most likely lower your score.
What’s the difference between a car loan and a personal loan?
Personal loans are generally unsecured and used for a wider range of purposes. They also have higher interest rates than secured car loan.
Is a deposit required when I finance my vehicle purchase?
Many lenders offer no-deposit loans or 100% auto financing. However, putting up a deposit increases your chances of approval. Moreover, it helps to lower total costs since you have to borrow less.
What do I do if the lender denies my application?
Do your research to discover the exact reason for the denial. More often than not, a rejected application results from choosing the wrong type of finance or lender. Go through this guide and use our comparison checklist to find the best fit for you.
Can I refinance my auto loan?
Yes – refinancing allows you to switch to an auto loan with more favourable terms. For instance, it’s not always easy to find the best car loan interest rates. But, when you do, you can apply for the cheaper loan. This new loan then pays off the old one, and you can then continue with more affordable repayments.
A short glossary of car loan terms
Collateral – An asset you put up as guarantee for a loan, and which the lender claims if you fail to repay.
Residual value – In the context of car leases, this is the estimated value of a car when the lease expires.
Loan term – The repayment period for your loan. For vehicle finance, the repayment period typically ranges from 12 months to 10 years.
Loan-to-value ratio (LVR) – A percentage calculated by dividing the loan amount with the actual value of the vehicle.
Loan repayments – These are small payments you make to the lender after borrowing money. Repayments can be weekly, fortnightly, or in most cases, monthly.
Guarantor – An individual you add to your application, usually a close friend or family member. The guarantor will be responsible for your repayments if you default.
Learn more about how car loans work in this video
Popular car loan searches
Carla is a skilled copywriter at BestFind with a background in marketing and communications. She specializes in reviewing personal loan and finance products to help readers navigate the complex world of personal finance.
