Compare Used Car Loan Rates

What is a used car loan?

A used car loan is a specific type of finance designed to fund the purchase of a pre-owned vehicle, often using the car itself as security for the lender.

Many Australians buy used cars but if they don't have the funds to purchase one outright, a used car loan can help cover the cost. A used car loan is a type of personal loan that allows you to purchase a second-hand car but typically up to a certain age - approximately seven years old.

One of the main reasons lenders place an age limit on the used cars they'll finance is to minimise their risk. Lenders want to have some confidence that the car will outlive the term of the loan.

Taking out a used car loan is much like any other car loan. The lender will provide you with the money needed to cover the purchase price of the car. From there, you repay the loan amount, plus interest, in regular installments over a set period of time agreed with the lender.

How to compare used car loans?

There are a few things to weigh up in choosing the best used car loan to suit your personal circumstances. Let's run through them:

Interest rates

As with any loan, the interest rate will determine the amount of interest you'll pay over the life of the loan. If you choose a variable rate car loan, your loan repayments can rise or fall over the term of your loan. Alternatively, a fixed rate car loan means your interest rate and repayments will stay the same.

Fixed rate loans can be useful if you want to know exactly what repayments you'll be up for during the life of the loan. This can help with longer-term budgeting. But if you're looking for greater flexibility, a variable rate loan may be the better option for you.

Secured vs unsecured

There are two types of car loans - secured vs unsecured - and you can choose between the two.

A secured car loan is when a lender uses an asset (usually the car you're buying) as security for the loan. If you fail to make your repayments, the lender has the right to repossess the car in a bid to recuperate the debt. Secured car loans will generally have lower interest rates than unsecured car loans, as they are considered to be less risky to lenders.

On the other hand, an unsecured car loan doesn't require you to use your car as security. Understandably, this poses a greater risk to the lender, usually attracting a higher interest rate, more fees, and greater scrutiny of the borrower.

When it comes to used cars, the age of the vehicle and its condition are key factors in determining whether you might be eligible for a secured loan. Generally speaking, cars up to 12 years old can still be eligible for a secured loan but vehicle age requirements can vary greatly between lenders. Bear in mind, if the lender isn't convinced that the value of the car is enough to secure the loan amount, you may need to offer up an alternative asset as security - or choose an unsecured loan.

Balloon payment

A balloon payment is an agreed-upon lump sum paid to your lender at the end of your car loan term. While balloon payments are more commonly associated with new car loans, making a lump sum payment at the end of your loan term effectively allows you to reduce your regular loan repayments in the interim. Generally speaking, balloon payments tend to make the loan more expensive overall but provide for more manageable repayments until the final payment is due.

Fees

Many car loans come with fees and charges which can vary depending on the lender. Always check a loan's comparison rate along with its interest rate to give you a better indication of the additional costs that go with the loan.

Penalties

Make sure you check the fine print on penalties which could include a charge for missed or late payments or, alternatively, for early repayment if you pay off your vehicle before the loan term.

Comparing used car loans, new car loans, and personal loans

When considering how to finance a vehicle, borrowers often weigh the differences between new car loans, used car loans, and even personal loans. Each option carries unique implications for interest rates, repayment terms, and overall affordability, making it important to understand how they compare.

New car loans are generally offered for vehicles up to three years old. These loans are often secured against the car itself, meaning the lender can repossess the vehicle if repayments are missed. Because new cars are considered lower-risk collateral, interest rates tend to be lower, borrowing limits higher, and repayment terms longer—making monthly installments more manageable.

Used car loans, on the other hand, typically apply to vehicles older than three years, though criteria vary by lender. They are more likely to be unsecured loans, which means the car isn’t held as collateral. This increases the lender’s risk, often resulting in higher interest rates. Borrowing limits are lower, reflecting the reduced value of older cars, and repayment terms are usually shorter, which can lead to higher monthly payments.

Personal loans differ in that they are not tied to a specific car purchase. They are usually unsecured and rely heavily on the borrower’s creditworthiness. Interest rates vary widely depending on credit score and income, while loan amounts are flexible but often capped lower than secured car loans. Repayment terms are generally shorter, with fixed monthly payments that may be less forgiving than those offered by car-specific financing.

Deepak Shukla

CEO of Pearl Lemon Accountants

Navigating higher rates in used car financing

Used car finance right now is heavily credit-driven, probably more than most people expect. Rates are still sitting higher than what buyers got used to a few years back, so even a small shift in credit score can noticeably change what you’re offered. Lenders are also a bit more cautious at the moment, which shows up in tighter approvals and pricing that can vary quite a lot between applicants.

A lot of buyers get better results when they sort pre-approval before stepping into a dealership. It just gives you a clearer ceiling on what you can actually afford, and takes away some of that back-and-forth pressure. Credit unions and smaller lenders tend to come out stronger on pricing in many cases, especially if you’ve got stable income and a clean-ish credit history.

One thing that comes up again and again is people locking in on the monthly payment and not really looking past it. It’s an easy trap to fall into. But longer loan terms can quietly push up the total cost quite a bit, even if the monthly number looks comfortable.

Refinancing is also coming back into play. Not for everyone, but for some borrowers who improve their credit after 6 to 18 months, there’s often room to reduce the rate a bit compared to what they started with.

Pros and cons of used car loans

Pros

• The buyer doesn't have to pay the entire balance upfront: Not everyone has the money to pay for a car outright. Taking out a used car loan for all - or some - of the balance allows consumers to have access to the vehicle they choose while paying off their car over time.

• Builds credit score: A used car loan can be a good way to build credit history to help you establish a reputation as a trustworthy borrower. Of course, this only happens if you are diligent with meeting your repayments.

Cons

• Higher interest rates: Used car loans may come with higher interest rates than new car loans, but not always. Shopping around between lenders is essential. A good credit history can also help you secure a better interest rate.

• Depreciation: Vehicles are among the fastest depreciating assets money can buy. Generally, a car will lose value quicker than the loan is paid off, which means your car can potentially be worth less than the loan amount that's owing. It's worth noting though that new cars tend to depreciate faster than used cars.

What to look out for when buying a used car

Buying a big asset like a car is a big decision for anyone. From choosing the brand, to the model of the car, then working out your finance, there's much to consider.

To help you find your perfect pre-loved car, here are some tips to help you on your hunt:

Research

Do your homework. You don't want to buy the first car you see just because you didn't have time to research the market.

When looking for a used car, consider what type and model would suit best suit your needs and, importantly, fits within your budget. It's a good idea to evaluate the strengths and weaknesses of each vehicle type you're looking at - safety, reliability, fuel economy, running costs, parts availability, etc.

Contact the seller

Arrange to have a chat with the seller to ask about any details that may not have been included on the car advertisement.

You may want to ask the following questions:

• How long have you owned the car?

• Why are you selling the car?

• Has the vehicle ever been damaged or in an accident?

• What is the car's history?

• Is there any current damage to the exterior or interior?

• Was the car used by smokers?

• Can I take the car for a test drive?

• How detailed is the car's service history and do you have the service book available?

• Can I get the car inspected before I buy?

Arrange an inspection

It's always best to see before you buy or have the car inspected by an expert if you're not sure what to look out for. This should be easy enough through a used car dealer but will need to be arranged if you're buying privately.

Ask the seller whether they'd be happy for you to see the car at their address, and if you could have someone with mechanical knowledge give it a once-over. If they aren't willing, you might be best to keep looking.

Check the car and its history

The first thing you want to do when you've found the perfect vehicle is to check its history.

With the car's Vehicle Identification Number (VIN), you can check the history of the car against the databases in the state or territory it's registered in. From there you can find out whether it's been stolen, encumbered by an outstanding loan, or even a previous insurance write-off.

If all goes well, the next step is to have a detailed look over the car or have a mechanic conduct a thorough inspection to make sure you haven't missed anything. There are mechanics that specialise in pre-purchase inspections, and they can be worth the investment.

Here's a guide to inspecting a vehicle yourself:

• Check underneath the body and bonnet for signs of rust etc.

• Check the gaps between the body panels are equal. If not, it could indicate the car has been in a crash and had poor repairs

• Check the engine (this is where a mechanical inspection can be invaluable)

• Check the tyres to ensure they have plenty of tread

• Make sure all the seat belts are working

• Make sure the radio, sound system, and all the switches and other features in the car work

Overall, you want to inspect the exterior and interior of the car to make sure it's up to standard.

Take the car for a test drive

When you take the car out for a test drive, there are a few things you may want to think about:

• Check the steering wheel for any free play, pulling to one side, or vibration

• Test the brakes to ensure the car stops smoothly and strongly

• Listen for any odd noises coming from the engine e.g. rattling or knocking sounds

• Check gear changes are smooth

• Make sure the functions - lights, wipers, air-conditioning, radio, etc. - are in working order