Factsheet: Car loans
ONLINE TEXT VERSION - August 2011
Apart from your home, a car is one of the
biggest single purchases you're ever likely to make.
If you don't have the cash to pay for it upfront, you'll need to
borrow money. And, depending on the type of car you choose, you
could be paying off your loan for some time.
So don't let the thrill of owning a car get in the way of making
good financial decisions.
Richie found it pays to shop around
Richie went into a car dealership to look at a red sports car.
It was sleek and very very fast. Richie went for a test drive and
just had to have the car. He got all the optional extras and then
the car salesman arranged a loan for him. Richie drove away
from the dealership with a loan for over $45,000. When he got home
he spoke to his dad and realised he had paid way too much for the
car and that he could have found a better loan if he had shopped
How do car loans work?
- 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 agree to repay within a certain period of time (called the
term). This can vary, but is usually 12 months to
5 years. You will have to sign a credit
contract which will specify the amount borrowed and how
you will repay it.
- You pay interest on the amount you borrow, which may be at a
fixed rate (where the interest rate is locked in
for the term) or a variable rate (where the rate
may go up or down over the term), plus any fees and charges. While
a fixed rate loan offers the benefit of set repayments, if you want
to make extra payments from time to time, and pay out the loan
early, you may be charged an early termination fee.
- A car loan may be secured or
unsecured, depending on whether you put up your
car (or other asset) as security for the loan. With a secured loan,
you usually pay a lower interest rate than for other kinds of
lending - but it also means that if you fall seriously behind on
your repayments, your credit provider has the right to sell your
car (or other asset) to get their money back. Secured loans are
usually only available for newer cars, because they are more
valuable as an asset. With an unsecured loan, you do not need to
mortgage your car as security, but you will likely
pay a higher rate of interest because the credit provider is taking
a bigger risk.
- If you buy from a car yard, the car dealer might offer to
arrange finance for you. While dealer finance might seem more
convenient, banks, building societies, credit unions and specialist
lending and leasing companies also offer car loans, so check out
what's on offer so you can compare and choose the best loan for
Choosing a car loan
||How it works
||What to watch out for
You offer an asset, such as the car you are buying, as
security or collateral for the loan.
- If you don't make repayments, the credit provider can
repossess and sell your asset to get their money back
(without going to court).
- The age of your car will affect its resale value. If your
car is sold for less than you owe, you can end up having to
pay the credit provider the difference.
You do not need to have an asset to offer as security.
Unsecured loans are usually harder to get, as you need
to convince credit providers that your credit worthiness
and financial position are good enough for them to give you a loan
without you having an asset to sell if you can't pay your debt.
- If you fail to repay the loan, the credit provider can
still take you to court in order to sell your property and
recover the money.
- Interest rates are usually higher than for secured loans,
since the credit provider is taking a bigger risk.
Interest rates and fees and charges can stack up, so do
your homework before you sign up for a loan.
Shopping around for the best deal
Get the best credit
deal before you buy
- Be sure to get the best credit deal. This is as important as
getting the best price on the car. By shopping around for
credit first, you can find the best deal for you without your
mind being distracted by that new set of wheels.
- Check out your loan options before you go shopping for your
car. Many credit providers will give you in principle
approval for a loan before you find your car, so that
you know exactly how much you've got to spend and you'll
only have one high-pressure decision to make at the car
- Beware of getting a car lease when you really
wanted to get a loan. With a lease you rent the car for an
agreed period of time, but do not have a right or option to
purchase the car. At the end of the period, the lease is
terminated and the car 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. So, if you want to own the car, do not
get a lease
Budget for the full costs of owning a car
- Before you get your loan, budget for the full costs of owning a
car. There are annual fees for registration and
insurance. You may also choose to join a motoring organisation for
roadside assistance. On top of that there are ongoing
costs like petrol, repairs and maintenance - even road
- You might decide to get third-party property
insurance or full comprehensive insurance
for your car. Third-party property insurance covers you for damage
to other people's vehicles or property that is not covered by your
compulsory comprehensive third party (CTP) insurance. Full
comprehensive insurance also covers you for damage to your own
- While insurance can be expensive, think how much not having it
could cost you later if you have an accident. But make sure you
shop around for the best deal - it is often cheaper to arrange your
own insurance, rather than going through the car dealership. Be
aware that if your car loan is secured by a mortgage over your car,
you will usually need to get comprehensive insurance for your
Watch for add-ons and only pay for those you
- Be careful of loan protection insurance sold
as an add-on when you get the loan. With this type of coverage, the
insurance provider pays or contributes to your loan repayments if
you are unable to work due to injury, sickness or involuntary
unemployment. In the event of your death, life cover will repay
your outstanding loan balance. This type of insurance is usually
poor value for the cost, so shop around.
- You may be offered gap cover (or
shortfall insurance). If your car is stolen,
written off or damaged beyond repair before you have paid off your
car loan, this insurance is designed to cover the 'gap' between the
market or agreed value that your comprehensive insurer pays and the
amount needed to pay out the remainder of your loan (up to a
specified limit), plus some additional costs. Think carefully about
whether you need this additional coverage and make sure you shop
- You may also be offered an extended warranty
(also called mechanical breakdown cover). This is
really extra insurance, to cover the costs of unexpected mechanical
repairs, parts and labour (with the exclusion of normal wear and
tear). But before buying an extended warranty, make sure it is
really worth the money. Does the extended warranty offer more
protection than the warranty that comes with the car? When does the
extended warranty start? Are there any important restrictions or
conditions? Check that the benefits are worth the extra money and
that the extended warranty does not simply repeat items covered
under the warranty that comes with the car.
- You do not have to take up any of these extra options if you
don't want to, and the person offering you extra cover must
not mislead or deceive you about the real benefits of additional
insurance coverage or your need for it. Always check the
terms and conditions of any additional coverage,
as they may vary from those included in your comprehensive
insurance coverage. Take your time to work out what you really need
and don't feel pressured to make an on-the-spot decision.
Only sign a business declaration if you are really using
it for business
- Do not sign a business purpose declaration
unless you are really using the car for business and are eligible
to claim your payments as a valid business expense for taxation
- By signing a business purpose declaration, you may lose
valuable rights under the credit law.
Six steps to smarter borrowing
Work out if you can afford to borrow
- Before you borrow, use our budget planner to see exactly where you
are spending your money and how much you can afford in
- If your job is not secure, it may be better to build up a
bigger deposit before getting a loan.
- Save up as much as you can, so you can borrow less and save on
- Remember to allow for interest rate rises and anything that
might affect your future income (such as changing jobs).
Shop around for the best deal
- If you decide to borrow, take time to compare interest rates,
product features, and fees and charges. Even a small difference in
the interest rate can make a big difference to what you have to
- Shop around online to compare products.
- Research published by the independent consumer group CHOICE
can also help you find the right product for your needs and
- If you want to borrow a small amount (less than $5,000), you
may have difficulty getting a loan from a bank or other mainstream
credit provider. Some credit providers offer small personal loans
in return for comparatively high interest rates and fees.
- Check the terms and conditions of your car loan before you go
ahead, so you know exactly what you're getting into - including
penalties for missed repayments or for paying off a loan
- If you feel like you're being pressured into signing something
you're not sure about, take more time to think things through. See
our tips for resisting pressure selling.
Know who and what you're dealing with
- Anyone who wants to engage in credit activities
(including brokers) must be
licensed with ASIC, or be an authorised representative of someone
who is licensed. If they aren't, they are operating illegally.
- There is currently an exemption from licensing for credit
assistance provided through some businesses (for example,
retail stores and car yards). While the store may be exempt, the
actual credit provider must still be licensed. If you are unsure
who the credit provider is, ask the person you are dealing with to
point out the name in your credit contract.
- Find out if a credit provider is
licensed or call ASIC's Infoline on 1300 300
- Anyone engaging in credit activities (for example, by providing
credit or assistance to you) must give you either a credit guide
(with information such as their licence number, fees and details of
your right to complain) or a written notice with details of how to
complain about their activities.
Keep up with your repayments
- Keep your repayments up-to-date to avoid being charged any
- Make extra payments when you can to save on interest (provided
there is no penalty for doing this).
- Make sure you keep the car comprehensively insured. If you have
a secured loan for your car, you will usually need to get
comprehensive car insurance. But whether your car is security for
your loan or not, accidents and thefts do occur and you do not want
to be left with no car and a large loan still to repay.
Get help if you can't pay your debts
- Act quickly if you are having trouble making repayments. It may
be difficult to face the problem, but ignoring it will only make
- If you can't make the full repayment, pay what you can. Contact
your credit provider without delay.
- If you are experiencing financial difficulties, you have the
right to apply to the credit provider for a hardship variation. If
the credit provider refuses, you can complain to its independent
dispute resolution scheme (see step 6 below).
- There are places you can go for help. See our sample letters
and information about support services such as financial
counselling and legal assistance, call the National
Debt Helpline on 1800 007 007 or ASIC's Infoline on 1300 300
- See our factsheet Can't pay your
|Step 6. Complain if things go
- Try to resolve your problem with your credit provider
- If you aren't satisfied, take your complaint to your provider's
independent dispute resolution scheme, the Australian
Financial Complaints Authority (AFCA). You can call
them on 1800 931 678.
- If you think that a credit provider has acted unlawfully or in
a misleading way, you can complain to ASIC online or call ASIC's Infoline on
1300 300 630.
ASIC Infoline: 1300 300 630
Disclaimer: Please note that this is a
summary giving you basic information about a particular topic. It
does not cover the whole of the relevant law regarding that topic,
and it is not a substitute for professional advice.
© Australian Securities and Investments Commission 2011
Last updated: 12 Nov 2018