The move is part of the bank's commitment to combat climate change and achieve net zero carbon emissions by 2035.
Bank Australia chief impact officer Sasha Courville said that encouraging the shift to electric vehicles (EV) will be an important step in decarbonising the Australian economy.
"By ceasing car loans for new fossil fuel vehicles, we are sending a signal to the Australian market about the rapid acceleration in the transition from internal combustion to electric vehicles we expect to see in the next few years," Ms Courville said.
"We’ve chosen 2025 because the change to electric vehicles needs to happen quickly, and we believe it can with the right supporting policies in place to bring a greater range of more affordable electric vehicles to Australia."
Bank Australia made the announcement at the National Electric Vehicle Summit in Canberra, and is reportedly the only bank in Australia with a 2035 net zero carbon emissions target.
The bank will continue to support customers who can't yet access an electric vehicle, offering finance for second-hand petrol and diesel cars.
"While we will cease car loans for new fossil fuel cars from 2025, we are deeply aware that we need to support people not yet able to afford an electric vehicle while the market grows," Ms Courville said.
"We’ll continue to offer loans for second hand fossil fuel vehicles until there is a viable and thriving market for electric vehicles."
There are a number of factors that have kept Australian drivers out of the electric vehicle market, including the lack of available charging stations, long waitlists and high prices compared to petrol vehicles.
It's estimated 43% of Australia's transport emissions are currently from passenger vehicles.
Changes in the electric vehicle market
The Albanese Government has recently vowed to help improve electric vehicle availability, establishing Australia's first National Electric Vehicle Strategy.
The strategy involves improving the uptake of electric vehicles and improving affordability and choice by growing the electric vehicle market in Australia.
The Government has already acted on making electric cars cheaper by removing the fringe benefits tax and the 5% import tax for eligible electric vehicles.
The new strategy also involves the establishment of a national EV charging network.
Charging stations will soon be available at an average interval of 150km on major Australian roads.
Climate Change and Energy Minister Chris Bowen said the National Electric Vehicle Strategy is necessary for the 21st century.
"Up until now, Australian households and businesses have had very little choice regarding low-emissions and fuel-efficient vehicles, and they have been paying for it," Mr Bowen said.
"The National Electric Vehicle Strategy is designed to make EVs cheaper, increase their uptake and roll out more charging infrastructure – ensuring more Australians can access these vehicles and reap the benefits."
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