Shaun McGowan
What is a car loan?
A car loan - also called vehicle finance or car finance - is generally a fixed-term, fixed-rate, secured loan used to purchase a vehicle. The car will be used as collateral on the loan, which results in a better deal than an unsecured personal loan. A car loan can be arranged through a bank, car dealership, finance broker or online.
In this car loans guide, you’ll learn:
- How a car loan works
- Where to apply
- How to apply and how to qualify
- How to choose between a bank, dealership or broker
- Car loan terms
- Which types of cars you can finance
- What to look out for if buying a car through private sale
How do car loans work?
A car loan is essentially a secured personal loan; you borrow an amount of money to finance the purchase of a vehicle and repay the loan amount - plus interest - over a fixed term to the lender. Repayments can often be negotiated to be either weekly, fortnightly or monthly.
The main difference between a personal loan and a secured car loan is that you will use the vehicle you purchase as security on the loan amount, which will give you a lower rate as the risk to the lender is reduced. The rate and fees applied to your car loan will vary, depending on the lender, the age of the vehicle, and your personal credit profile.
Compare Car Loans
To compare car loans, you’ll need to look at the total repayment being offered which includes any fees and charges. Matching these with the approval speed and simplified processes offered by various lenders will help you get the best car loan for your circumstances.
Below, you can compare car loans from a bank, directly from a car dealership, or by using a vehicle finance broker. Keep in mind, the cheapest car loan isn't necessarily the loan with the lowest advertised rates.
Secured car loans will generally use a fixed-rate - i.e. the repayment made doesn’t change over the term of the loan. With these loans you generally cannot make additional repayments or repay the loan earlier than initially agreed.
Banks
Banks are a common source of car finance. You probably already have an established relationship with at least one bank, perhaps via savings or investments accounts, and/or a mortgage - and this can help streamline the application and approvals process.
Car loans from banks are often somewhat more flexible in relation to the terms and conditions, and allow you to either repay your loan early without penalties or extend your term to reduce your regular repayment amount.
Banks often will use a personal loan, not a secured car loan - you may have greater flexibility but you will pay a higher rate on this type of financing.
Car dealerships
Car dealers routinely offer car loans to their customers. The main benefit to this form of finance is convenience - the dealership becomes a one-stop shop for not only the disposal of the old car and the acquisition of the new car, but also the loan that underpins the transaction.
Dealerships are heavily incentivised to sell their in-house finance to their customers. Significant commissions are often attached to these car loans, and this means the total repayment including fees and charges, often represent poor value to borrowers compared to applying with a bank or finance broker.
Vehicle finance brokers
Finance brokers generally have access to a pool of specialist car finance providers.
Using a broker allows you to compare your objectives as a loan applicant against a range of competing car loan products, to arrive at the car loan that suits you best.
Because a broker is familiar with the approval criteria of many specialist lenders, they’re able to provide specific advice about not only selecting the right financier, but also how to submit your application so that the required compliance is demonstrated, quickly and efficiently.
When selecting a car loan provider it’s important to consider the loan features you need (such as the capacity for early repayment without penalty) in addition to just the rate, the fees and charges.
You should also be realistic about the likely timeframe in which you will upgrade to your next car, and ask the financier to arrange the term of the loan to correspond with that.
Most car loans are structured over 5 years, although most people break this term and upgrade their cars after 3 years.
Compare Car Finance Options: Banks vs Dealerships vs Finance Brokers
| Pros | Cons | |
|---|---|---|
| Bank Car Loan | Lower overall costs | Higher cost than non-bank lenders |
| Dealership Car Loan | Convenient | Unlikely to be the best deal available |
| Finance Broker Car Loans | Compare lenders to get the most suitable deal | Requires you to pay a small broker fee |
What are the other types of car loans available?
In Australia, there are a number of vehicle finance options available besides a standard car loan. Depending on your personal situation - such as whether you are using the car predominantly for business use - there are a few alternatives worth considering, including:
- Novated Lease - A novated lease is a tax-effective way to purchase a car, with repayments made from your pre-tax salary - learn more in our Novated Lease Guide.
- Chattel Mortgage - A chattel mortgage is a type of equipment finance in Australia, and works in a similar way to a standard car loan. A chattel mortgage can offer significant GST benefits to a business, which you can learn about in our Chattel Mortgage Guide.
- Car Lease - A car lease is a type of vehicle finance where a lender will purchase a vehicle and rent it to the borrower over a fixed period. The two types of car lease you will consider in this situation are an Operating Lease and a Finance Lease.
The primary difference between a car loan and a car lease is that you will not own the vehicle at the end of the term - however, you will generally have the option to purchase the vehicle from the lender if you agree to a Finance Lease. You can learn more about the benefits of each type of business vehicle finance in our Business Car Loans Guide.
Equipment finance is used by businesses in Australia to purchase all types of assets - one of the primary assets purchased is a company vehicle.
How to apply
You can apply for a car loan in Australia if you are:
- Over the age of 18; and
- An Australian Citizen or Permanent Resident; and
- Are employed or have a regular source of income
You’ll need to demonstrate your ability to repay the full loan amount to your lender, and you can streamline your application process by preparing supporting documents:
- Proof of identity - i.e. passport or driver's licence
- Proof of income
- Proof of your assets
- Details of any current debts and expenditure
How do lenders assess a car loan application?
When assessing your car loan application, lenders will consider:
- The amount of money you wish to borrow
- The age and type of vehicle you wish to purchase
- Your personal credit history
Each lender will have different rates and qualifying criteria, but the ideal candidate for a car loan will:
- Have a clean credit history
- Have been in regular, stable employment for two years
- Be able to provide address history for two years
- Be looking to finance a brand-new or fairly new vehicle
- Be obtaining the car through a dealership or car franchise
- Be able to provide a deposit (though this is not necessary)
Keep in mind this is only the ideal candidate for a car loan. You can still get quick approval on a car loan if you are:
- Buying a used vehicle
- Purchasing a vehicle through private sale
- Do not wish to provide a deposit
- Have an imperfect credit history
Car loan terms
Most lenders will offer a range of loan terms between two and seven years, though the average term is five years. The term on your car loan will often be fixed - i.e. you can’t extend your loan term.
Car loan minimum and maximum terms
| Minimum Term | Maximum Term |
|---|---|
| 2 years | 7 years |
When deciding on a term for your car loan, you’ll need to factor in the age of the vehicle when you purchase it and the age of the vehicle at the end of the term. Generally, a vehicle will need to be no older than 12 years at the end of the loan term.
Car Age vs Loan Term eligibility
| Vehicle Age | Term | Vehicle age at end of loan term | Suitability for finance |
|---|---|---|---|
| 7 years old | 3 years | 10 years old | Yes |
| 7 years old | 6 years | 13 years old | No |
Car loan fees and charges
Car loans will have various fees attached, which may include:
- An establishment fee once your loan is approved and you accept the offer
- Ongoing service or account-keeping fees
- Penalty fees for early repayment
- One-time broker fees if using a vehicle finance broker
If you agree to a car loan that includes early repayment penalties, these will often be charged at a set fee on the number of months you repay early. For example, your early repayment fee may be $10 per month. If you choose to repay the equivalent amount of one year’s repayments early, you will be charged $120.
In the table below, you can see how appealing rates on a car loan won’t always mean you receive the lowest total repayment amount. Over time, monthly fees can add up to a significant amount over the term of your loan.
Car loan fees can greatly affect your loan repayments
| Loan Amount | Loan Term | Rate | Fees (monthly) | Monthly Repayment |
|---|---|---|---|---|
| $30,000 | 5 years | 6.00% | $0 | $579.98 |
| $30,000 | 5 years | 7.00% | $30 | $624.04 |
| $30,000 | 5 years | 8.00% | $0 | $608.29 |
| $30,000 | 5 years | 9.00% | $30 | $652.75 |
| $30,000 | 5 years | 10.00% | $0 | $637.41 |
To quickly compare loan amounts and see your estimated repayments on a car loan, use our free car loan calculator.
Before you agree to a car loan, you’ll want to fully understand and assess the impact any monthly fees may have on both your monthly repayments, and total loan repayment amount.
Credit score for car loans - approval criteria
If you have a clean credit file, it should be very easy to get approval for a car loan if you meet basic lender criteria. Negative aspects of your credit file can be broken into three categories, shown below from least to most severe:
- Defaults
- Part IX debt agreement
- Bankruptcy
If you have a history of defaults or a poor credit score, you can learn more about how to apply for vehicle finance in our Bad Credit Car Loans guide.
Non-streamlined applications will require more exhaustive documentation when applying - it's important to know what you'll need to provide a lender to ensure the fastest approval time.
What cars can I buy with vehicle finance?
You can finance most vehicles with a car loan, however newer vehicles and vehicles purchased from a dealership or established car franchise will be easier to approve finance for. Different lenders have restrictions as to where a vehicle can be purchased, the age of the asset and the amount being lent against a vehicle. Important considerations include:
The vehicle must be no older than 12 - 15 years at the end of the loan term. In general, a vehicle must be no more than 12 years old at the end of the loan term for a borrower to be granted approval for vehicle finance.
Most financiers will not lend on “grey imports” – Nissan Skylines are often the most common example of this. A grey import indicates a vehicle has been imported as a used vehicle, and was not originally sold by the manufacturer in Australia.
Vehicles with negative reports on the Personal Property Securities Register (PPSR) will not be considered for finance. This may include the vehicle being reported stolen, written off, or incorrect odometer readings.
Getting car finance for private sale
There are some strict guidelines in place for obtaining finance for privately bought cars, and it is the buyer’s responsibility to conduct checks on the vehicle to ensure it meets finance criteria. These checks are performed to ensure the vehicle is not stolen or written off, and crucially whether the vehicle is still under finance by another borrower.
If you are buying a car through private sale, you will want to establish that:
- The seller owns the vehicle
- Has the right to sell
- The vehicle’s title is free and transferable
- The proceeds of the transaction are going back to the seller
Where a vehicle is still under finance from a previous loan agreement, this is referred to as ‘encumbrance’, and will not be approved for vehicle finance. As mentioned at the start of this guide, the vehicle you purchase through a car loan will act as security on the amount borrowed from a lender. To sell the vehicle before the loan is repaid would be to remove the vehicle as collateral, and therefore present a much greater risk to the lender.
To learn more about how to buy a car through private sale, including how to organise an independent vehicle inspection and obtain a car history report, you can read our Private Sale Car Loans guide.
Always check a car to ensure it has no finance owing. If you purchase the car from the seller and there is money owing, you will be forced to also pay this debt (not the original owner).
Car Loans summary
In summary, car loans in Australia:
- Are fixed-term, fixed-rate secured loans
- Are arranged through a bank, car dealership, finance broker or online
- Can include weekly, fortnight, or monthly repayments
- Range between 5.00% and 29.90% interest
- Range between two and seven years in length
- Can be used to finance almost any personal vehicle
- Can be used to purchase cars through private sale
Car Loans FAQ
How do I qualify for a car loan?
If you are over the age of 18, a permanent resident of Australia, can verify that you earn a steady income, and demonstrate an ability to repay your loan amount, you will qualify for a car loan.
How much can I borrow on a car loan?
You can generally borrow between $5,000 and $100,000 on a car loan in Australia, though the average amount is around $30,000. The amount you're able to borrow for vehicle finance will be assessed according to your income and credit profile.
Can I get a car loan with bad credit?
Yes, you can get a car loan with bad credit. However, you often won’t qualify for a standard car loan, and will need to apply for a specific loan product called a Bad Credit Car Loan - these will often have higher rates and you will generally be required to provide extensive supporting documentation to prove your ability to meet repayments.
How quickly can I get approval for a car loan?
Approval time will vary from lender to lender, though can be anywhere from a few hours to a few days. You’ll get the fastest approval time if you have a clean credit history, are in stable employment, are wishing to finance a brand-new vehicle and are willing to provide a deposit.
How do I get pre-approval on a car loan?
Pre-approval is a great way to assess your borrowing eligibility and ability to repay your loan amount before selecting a vehicle. Most lenders will offer pre-approval on a car loan in Australia.
Can I buy a car through private sale?
Yes, you can purchase a vehicle through private sale in Australia. You will be responsible for ensuring the vehicle meets all legal requirements for finance, and it’s crucial you understand the process of purchasing a private sale vehicle when conducting pre-purchase checks.
Will my loan amount include insurance and on-road costs?
If you finance a vehicle through a broker or dealership, you may be able to include on-road costs and insurance in your car loan agreement. However, as a car loan is secured only by the vehicle itself, any additional finance beyond the purchase price may incur monthly fees on the loan.
Which vehicles can I finance with a car loan?
You can finance a large number of vehicles using a car loan, however the vehicle will generally need to be less than 12 years old at the end of the loan term to qualify. If you aren’t able to finance your vehicle of choice through a standard car loan, you may wish to consider other forms of vehicle finance.
Do I need a deposit for a car loan?
You often won’t need to provide a deposit for a car loan, though doing so will often get you faster approval or a better rate on your loan. Most lenders will allow you to borrow the entire purchase price of your car as long as you have a good credit rating and can demonstrate financial stability to comfortably meet your repayment obligations.
Can I make extra repayments on a car loan?
Most lenders will allow you to repay your car loan early, however some loans will come with early repayment fees. Depending on how much you repay and how soon into your loan term you may extra repayment, these early repayment fees are often lower than the interest you would save over the full loan term.
Can I buy a car on Gumtree using car finance?
Yes, you can get a car loan for a private sale advertised on Gumtree or any other online marketplace. The minimum purchase price needs to be $5,000 for a secured car loan.
Will applying for a car loan affect my credit rating?
Any finance application you make will be listed on your credit report - this is why it’s important to evaluate your financial situation and qualifying eligibility before applying for a car loan. If you choose to work with a vehicle finance broker, they will often provide a No Credit Check Assessment to indicate your eligibility for a car loan before applying.
What is vehicle depreciation?
Vehicle depreciation is the value lost on a vehicle as soon as it is driven away. As a car loan is a type of secured personal loan, there will often be a minimum amount you can borrow, which ensures the vehicle you purchase is of adequate value to act as sufficient collateral in the event of any depreciation.
