Car loans 101
Like seeing the road ahead, a solid understanding of car loans can help you navigate around the money potholes.
- Car finance options
- Guide to car loans
- Am I eligible for a car loan?
- What do I need to get a car loan?
- Getting pre-approved for car finance
Car finance options
When buying a new car you have five main ways of financing the purchase:
- Cash (buying it outright)
- Car & personal loans
- Dealership finance
- Novated leases
- Chattel mortgages
There are other methods you can consider such as a credit card or refinancing your home loan to include a car loan. Carefully consider each option before you jump into buying a car.
Financing a car out of state
Buying a car in a different state can be done in much the same way as within your home state, but there can be extra fees and costs to pay, like car transfer costs, title and registration costs, stamp duty (which can be higher in other states) and more. Financing a car in a different state shouldn’t be an issue if the lender is licensed in that state.
Financing a luxury car
The options for luxury car finance are essentially the same as the options for regular car finance – e.g. a car loan, dealer finance, a novated lease etc. However, note there is a luxury car tax (LCT) currently payable on any car above a certain threshold, which (at the time of writing) is $75,526 for fuel-efficient cars and $67,525 for other cars. Also, be wary that the tax benefits of novated leasing may be fewer on a luxury car compared to a non-luxury car.
Guide to car loans
Below are some commonly asked questions about car loans, though you can learn more with our free car loan guide.
What are the different types of auto loans?
There are two main types of car loans: secured, which use the car as collateral for the lender, and unsecured, which do not. Another common type is known as car loan with balloon payment. A balloon payment or “residual value” is an agreed-upon lump sum that you will pay to your lender at the end of the car loan term.
What are the differences between secured and unsecured car loans?
A secured car loan is one where an asset (the car you’re buying) is used as collateral against the loan, and can be reclaimed by the lender if repayments aren’t met. Unsecured car loans do not use your car as security. Secured car loans are generally less risky for lenders to provide, thus often have lower interest rates.
What are low doc car loans?
Low doc car loans are ‘low documentation’ car loans, available to people who can’t provide the usual documents needed to apply for one. They’re commonly used by self-employed people who can’t easily provide proof of income. Instead, a good credit history and proof of business ownership will often be enough. Low doc car loans may carry a higher interest rate than a standard car loan.
How long are car loans?
There are lots of different car loan terms available, but most reputable lenders will allow terms between one and seven years, with 10 years usually being the maximum. Your car loan term is how long it would take to pay off the car loan without any extra repayments.
Is it better to get a car loan from the bank or the dealer?
Car loans and dealer finance can be acceptable methods of car financing, so long as you do your due diligence and shop around. Dealer finance can often have faster approval times and lower interest rates compared to car loans, but they can also be less flexible and more restrictive. If you’re torn between the two, consider walking into a dealership with a pre-approved car loan under your belt and negotiating with the dealer to see if they can offer a better rate. For any type of car financing, be sure to take all the fees into account and look at what the total cost of the finance would be at the end of the term.
Am I eligible for a car loan?
Your eligibility for a car loan will depend on a variety of factors such as:
- The car model
- Whether the car is new or used
- The lender and the loan you’re applying for
- Your income
- Your credit rating and history
- Your assets and liabilities
- Your history of savings
Having a bad credit rating doesn’t disqualify you from getting car loans, but you might find it harder to get a good one.
Apply for a car loan with bad credit
If you have bad credit, you can boost your chances of being approved for a car loan by:
- Being realistic in your expectations & picking a modest car
- Being honest in your application
- Save some money beforehand
- Obtain stable employment
- Clean up existing debts
Also, work towards improving your credit history beforehand by paying bills and credit card repayments on time.
What do I need to get a car loan?
Basic car loan requirements often include:
- Proof of a steady, reasonably high income
- Proof of identity: driver’s license, Medicare card, passport etc.
- Proof of residence
- Proof of your ability to save money (try three-six months)
- Proof of your assets (like shares) and liabilities (like credit card debt)
Not having these on hand could reduce or eliminate your chances of having a loan application approved.
How to get a low-interest car loan
There can be may ways to get a low-interest car loan, but one of the best ways could be to maintain a clean credit history. This tells lenders you’re a trustworthy borrower, making them more likely to give you a good interest rate. Also, don’t forget to shop around to see which lenders are offering the lowest rates. Secured car loans also tend to have a lower interest rate than unsecured loans.
Getting the best car loan if you’re a student
Getting approved for a car loan as a student might be harder due to your lack of a credit history and lower income. But your chances of being approved for a student car loan can increase if you:
- Use a guarantor who can make the repayments if you can’t
- Have a steady income
- Borrow less
- Buy a used car
Should I salary sacrifice my car loan?
Salary sacrificing for a car can be done through novated leasing, which can be a viable option for car buyers. Salary sacrificing is an agreement between you, your employer and the finance company where your employer agrees to let you take your car loan repayments straight out of your pre-tax salary.
Salary sacrificing for a car can generate significant tax savings for some (consider talking to a registered tax agent about this), but since you don’t own a car (under a lease arrangement) there can be some limitations (e.g., driving restrictions, cannot make modifications etc.).
Can I refinance a car loan?
Yes, you can refinance your current car loan to a different car loan with different terms, or a different lender with a lower interest rate. When refinancing a car loan, the money borrowed from the new loan will cover the balance of your previous car loan, allowing you to pay off that old car loan before moving onto the new one.
Getting pre-approved for a car loan
A pre-approval car loan can be beneficial as it lets you know what you can afford before you go out to buy a car. To get a pre-approved car loan:
- Compare car loan providers to make sure you’ve found the right one
- Check your credit rating before applying
- Gather all of the necessary documents (100 points of ID, income, proof of employment, assets and liabilities etc.)
- Contact your chosen lender and tell them you want to apply for pre-approval
