Car loans 101

• Car finance options
• What makes a good car loan?
• Guide to car loans
• Am I eligible for a car loan?
• What do I need to get a car loan?
• How to apply for a car loan
• Getting pre-approved for car finance

Car finance options

In the market for a new car? The table below features car loans with some of the lowest and variable interest rates on the market.

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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.

What makes a good car loan?

To help you separate the good car loans and the bad car loans, this little summary should do the trick.

A low interest rate

A quick scan of the market at the time of writing (Jun 2020) for a variable rate new secured car loan shows you could get a rate of 4.69% (7.16% comparison rate) from one lender, which is pretty low. At the other end of the scale, another lender is offering a loan with an interest rate of 9.99% (10.88% comparison rate).

Little to no fees (low comparison rate)

But don't focus too much on the advertised interest rate at the expense (pun intended) of looking at the fees. There are some lenders who advertise a low rate on the loan, and it very well might be, but they might make up for it with exorbitant fees instead. As we explained earlier, looking at the comparison rate can help prevent you from falling for such traps, because they factor in upfront and ongoing fees. But some incidental fees (such as the costs of refinancing or early payout fees) aren't factored into the comparison rate, so it's worth looking into these to prevent being caught off guard in the event you need to pay them.

Extra features that suit you

Some car loan features to consider in a car loan include:

• Pre-approval option (e.g. to help you negotiate with car dealers)
• Flexibility to switch between weekly, fortnightly and monthly repayments
• Balloon payment options
• Flexibility to make additional repayments
• Redraw facility

Learn to spot a bad car loan

Don't go for convenience over affordability, flexibility and practicality. If you just walk into any dealership and accept the first financing deal you're offered, you're more likely to be stuck with inflexible terms, a lack of ongoing support and higher interest rates and fees. Always compare other options before you sign up to anything and read as much as you can about car loans to check if you're getting a good value deal.

Read more about the differences between dealer finance and car loans. To spot a scam car loan, ASIC recommends first checking if they're on their list of unlicensed companies.

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. 

How can I 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: 

1. Proof of a steady, reasonably high income 
2. Proof of identity: driver’s license, Medicare card, passport etc. 
3. Proof of residence
4. Proof of your ability to save money (try three-six months)
5. 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 many 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.

How to apply for a car loan

You might be anxious to get into your hot new wheels, but before you even consider going to a dealer or lender, you'll need to have a handful of forms and documents on you so they can get the measure of you as a person and as a borrower. Remember, it's their money that you're being lent, so your trustworthiness and strength of character will play a huge part in the terms you get given. When formally applying for a car loan, you'll generally need:

• 100 points of ID (at least): can include your drivers' license, passport, Medicare card and more
• The vehicle details: the make and model, registration number, engine number and purchase price, as well as whether it's new or pre-owned
• Proof of income: you might need two or three recent payslips as well as proof of employment, employer contact information and two years worth of tax returns for those of you who are self-employed
• Assets and liabilities: details on any properties you own, any other loans you have, your ongoing expenses and any other debts, such as credit cards.

Once all of that nerd stuff is out of the way, you can dive in and apply for your car loan - assuming you've done some thorough research into which one is best for you. Thankfully, applying for a car loan in the modern age is quick and relatively painless, as there are a host of entirely online-lenders that can fast-track your application if you have all of this information handy. The usual process involves:

1. You filling out an application form or filling in the blanks online
2. Your application is reviewed by a credit officer
3. The lender will then request your documents (possibly not all of them)
4. Upon acceptance of the loan, you'll be asked to sign it
5. Your loan will then be funded, either directly to the person or dealer you're buying the car from or in the form of a cheque

Bear in mind that those of you who are under 18 or not yet an Australian citizen may not qualify for a standard car loan product.

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:

1. Compare car loan providers to make sure you’ve found the right one
2. Check your credit rating before applying
3. Gather all of the necessary documents (100 points of ID, income, proof of employment, assets and liabilities etc.)
4. Contact your chosen lender and tell them you want to apply for pre-approval