Car loans
Financing your dream car
Apart from a home, a car is one of the single biggest purchases
you are likely to make. Don't let the excitement of buying a car
get in the way of making good financial decisions.
What can you afford?
Before you start looking for a car work out what you can afford
and what you are willing to pay. Include all the costs of
owning and running a car. This can include annual registration
fees, insurance, roadside assistance, petrol, repairs, maintenance,
and road tolls.
Find out how car repayments fit into your budget.
Budget planner
Once you know how much a car will cost, decide how much you want
to spend. For example, if you decide you want to spend $15,000,
then stick to it. The dealer may offer accessories for the car and
insurance products. However, these can really add up, and leave you
with a bigger debt.
If you can't pay for a car from savings, you will have to borrow
money. Save as much as you can so don't have to borrow as much. The
type of car you buy will determine how much you need and what your
repayments will be.
Work out the real costs of buying and running a car.
MoneySmart Cars app
Consider getting a good second-hand car. This can save you money
and you'll have more cash for other things like insurance. Before
you buy, do an ownership check for as little as $3.40 using the
Australian Government's Personal Property
Securities Register (PPSR) to make sure the car won't be
repossessed because the owner still owes money on it.
Choosing a car loan
A car loan is a personal loan for the specific purpose of
buying a new or used car.
You borrow an amount of money that you have to repay within a
certain period of time (called 'the term'). You will have to sign a
credit
contract that specifies the amount borrowed and how you will
repay it.
The term can vary, but is usually between 12 months and 5 years.
If you don't pay off the full amount of the loan by the end of the
term, or if you can't afford to make equal payments over the life
of the loan, the final payment must be made as a lump sum. While
this makes repayments affordable, you may be left with a large
amount of money to pay off or refinance when the term
ends.
Work out your loan repayments.
Personal loan calculator
Fixed and variable rate loans
If you shop around you can choose between a fixed or variable
rate loan. In a fixed rate loan, the interest rate is locked in for
the term of the loan. This means that your repayments will be set,
so you know exactly how much you have to repay each month.
But if you make extra payments from time to time and pay out the
loan early, you may be charged an early
termination fee. You will also have to pay account fees and
charges.
Car loan scams
Be suspicious if you are contacted out of the blue by a
company offering loans with low interest rates. See our tips on how
to pick a loan scam.
Secured loan
With secured loans you offer an asset, such as the car you are
buying, as security for the loan.
If you don't make repayments, the credit provider can repossess
and sell your asset to get its money back. The age of your car will
affect its resale value. If your car is sold for less than you owe,
you will still have to pay the credit provider the difference.
Unsecured loan
Unsecured loans are typically taken out for used cars. You don't
need to offer an asset as security however you may not be able to
borrow as much.
Interest rates are also usually higher for unsecured loans
because the credit provider is taking a bigger risk. If you don't
repay the loan, the credit provider can take you to court to
recover its money.
Peer to peer loan
You might be able to get a car loan without going through a
traditional lender such as a bank, building society or credit
union. See peer to peer lending for more
information.
Get value for your money
Just as important as getting the best price on a car is getting the best credit
deal. By shopping around for credit before you go shopping for
a car, you can find a loan that suits your budget and
circumstances.
Many credit providers will give you 'in principle approval' for
a loan, so you know exactly how much you can borrow and won't be
tempted to spend beyond your means.
Dealer finance
If you buy from a car yard, the dealer might offer to arrange
finance for you. While dealer finance might seem convenient you may
get a better deal by shopping around. Banks, building societies, credit unions and specialist
lending and leasing companies all offer car loans, so check out
what's on offer before you go for dealer finance.
Car leases
A car lease allows you to rent a car for an agreed period of
time, but you don't have the right to buy the car. At the end of
the period, the lease is terminated and the car is sold.
You could make an offer for the car, but you will usually need
to come up with a large sum of money to buy it and the credit
provider does not have to accept your offer. If you want to own the
car, getting a lease is not the right option for you.
Warning about business declarations
Only sign a business purpose declaration if you are really using
the car for business and can claim your payments as a valid
business expense for tax purposes. By signing a business purpose
declaration, you may lose valuable rights under the National
Credit Law.
Car insurance
You must take out compulsory third party (CTP) insurance before
you are allowed to take your car on the road. If you borrow
money and a lender takes security over the loan they will usually
require you to pay for comprehensive insurance. This insurance
covers damage to your own car and other people's property if your
car is in an accident (including fire), as well as covering you if
the car is stolen.
See car
insurance for more information.
Extra insurance offered by car dealers
If you are arranging finance for your car you may also be
offered add-on insurance products like loan protection, gap cover
or tyre and rim insurance. Think twice before you take up these
offers - they may not be good value for money, or only pay in
limited circumstances and they also add to the cost of your loan.
Find out more about add-on insurance.
Buying a car involves important financial
decisions. Be prepared and research your options before shopping
around for the loan and the car insurance as well as the car.
Related links
Last updated: 03 Apr 2018
