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. 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.

Work out the real costs of buying and running a car.

MoneySmart Cars app

Decide how much you can afford and stick to it. The dealer may offer accessories for the car and extra insurance products. However, these are often not very good value and can really add to your debt.

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, check 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. Dealer finance may be convenient, but it's important to shop around to make sure you get a good deal on your loan. Banks, building societies, credit unions and specialist lending and leasing companies all offer car loans, so check out what's on offer so you can compare and choose the best loan for you. 

Flex commissions 

From 1 November 2018, 'flex commissions' are banned. Flex commissions were paid by lenders to car dealers and finance brokers to encourage them to arrange car loans at the highest possible interest rate.

Dealers will no longer be able to charge customers more than the rate set by the lender. See ASIC's media release for more information. 

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. Research your options before shopping around for a car, as well as the loan or the car insurance.

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Last updated: 08 May 2019