Car Loans

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 lower interest rates 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 interest rates and 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 interest rate as the risk to the lender is reduced. The interest 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 interest rate, fees, and approval speed offered by various lenders to find the best car loan for you. Below, you can compare car loans from a bank, directly from a car dealership, or by using a vehicle finance broker. Keep in mind, a cheap car loan isn't necessarily the loan with the lowest rates.

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 you allow you to either repay your loan early without penalties or extend your term to reduce your regular repayment amount.

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 interest rate, together with the 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 interest 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.

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.

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 loan amount and interest 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, and illustrates an individual who would qualify for the lowest bracket of interest rates on their car loan. You can still get quick approval on a car loan if you are:

• Buying a used vehicle
• Purchasing a vehicle through provide sale
• Do not wish to provide a deposit
• Have an imperfect credit history

Car loan interest rates

Secured car loans will generally use fixed-rate interest offered at a range between 5.00% and 29.9%, while the average rate is around 8.50%. Fixed-rate car loans are those in which the interest rate 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.

A brand-new vehicle purchased from a franchise or dealership - i.e. not private sale - will often get you the lowest interest rates on a car loan. In the example below, you can see how three vehicles purchased from a dealership or franchise may affect car loan interest rates.

Important: This is an example and actual rates will vary.

0% car loans - too good to be true?

A car loan with a 0% annual percentage rate (APR) enables you to purchase a car at an agreed price, and make monthly payments on the principal loan amount without paying interest. Sound too good to be true? There are important factors to consider on a 0% car loan, including:

• 0% interest may only be applied to part of the loan term
• You will need an extremely good credit rating to apply
• You will often be unable to negotiate the sale price of the vehicle
• 0% may only be offered on some cars - often vehicles a dealership is desperate to sell
• If you are trading in a vehicle, you may be offered a lower trade-in price
• You may have to agree to a short term with high monthly repayments

Dealerships will offer 0% car loans for two main reasons:

• To clear inventory - a dealership may have had the vehicles on the car lot for a considerable amount of time and is desperate to get rid of them. In this case, they may offer 0% interest to ensure they can clear the remaining stock and purchase new vehicles. The dealership may only may a small profit on the sale, but it will still benefit them to sell the vehicle off.
• To draw in potential buyers - a dealership will know that advertising a 0% car loan will attract customers. However, if they customer doesn’t qualify for a 0% car loan with the dealership, they are already in the mindset of purchasing a car and could be sold on a different vehicle under a standard car loan agreement

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.

The term of your car loan will affect your regular payment amount. The longer the loan, the lower the regular repayment amount. However, you will pay a higher total interest amount over a longer term than a shorter term. You can see in the table below how a longer loan term affects your monthly repayment amounts and the total interest paid over the term.

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 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.

However, if you accept a long-term loan and are able to repay a significant amount early on in your loan term, the amount you save in total interest will often outweigh the early repayment penalties. In the example below, we’ve compared three car loans of $30,000, each with a term of 7 years. The early repayment penalty for each loan is $20 per month repaid early.

The sooner you repay your loan amount, the greater the amount of total interest you will save.

It’s also important to understand that interest rates aren’t the only indicator of a good deal on vehicle finance. 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.

To quickly compare loan amounts and see your estimated repayments on a car loan, use our free car loan calculator.

In the table below, you can see how lower interest 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.

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.

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.

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

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.