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.
Related links
Last updated: 08 May 2019
