Written by , updated on June 30th, 2023
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The most obvious benefit of a car loan is that you are able to purchase the car without having to pay anything upfront. 100% financing is common practice. Most people do not have the necessary savings to pay for a car in full or would prefer to use their savings for something else. (house deposit, investments etc)
A car loan also allows you to build and improve your credit history. So long as you pay your repayments on time you will see your score increase. Building a good credit history will benefit you with future financing requirements such as home loan.
Secured car loans come with very low rates, meaning that over a typical 5 year term your total interest over 5 years might be only a few thousand dollars, obviously this all depends on loan amount and price of the car you are purchasing. Due to car loans being secured by an asset, car loan rates are close to home loan rates, which is quite different to unsecured products like personal loans, credit cards and the like.
If you are purchasing the car for business use, the interest payable as well as running costs of the car can be tax deductible. The portion of the costs you can claim depends on the business used percentage.
There is a legal requirement for all dealers selling used cars as a business to be licenced. You could always buy a used car from a private seller of course, but you won’t have the same protections (e.g. warranty).
You will pay interest and some fee’s compared to paying it outright with cash, but rates are quite reasonable, making car loans an attractive offer.
As the car is secured by your loan, your car could be at risk of being repossessed by the lender if you fail to make repayments and default on your loan. If in the rare case this happened it could negatively impact your credit history.
Cars depreciate in value over the period of the loan. The rate of depreciation may depend on the type of car it is. In some cases, the amount you are still owing is higher than the market value of the car. This can become a problem if you want to upgrade mid-term as you will need to cover any gap between what’s owing to the finance company and how much you received from the sale of your car. If there are no plans to upgrade mid-term than this won’t apply.
Your credit history might have an impact on the interest rate and the amount you can borrow, so the first thing to do is to tidy up any finance-related issues. For example, consider paying off any defaults or credit cards that affect your credit history. Also, make sure you have good bank statement conduct, this means no regular overdrawing, excessive gambling debits and the like.
It is important to understand how much you can afford realistically. An online car loan calculator can help you roughly crunch the numbers. Take into account your other outgoing expenses to work out a comfortable loan term with the repayment amount you can afford. The longer the loan term is, the lower the repayments will be.
You have several options when looking to finance a vehicle. You can search for lenders online, enquire at the banks, or go straight to your dealer. Take your time to do the research and evaluate the quotes to find out which one suits you best. Try to avoid too many credit enquiries as they can have a negative impact on your credit score. If you don’t want to sort through the options yourself, contact a finance broker who can compare and find the best options for yo as they usually have a large panel of lenders under the one roof.
| Loan Type | |
|---|---|
|
Secured car loans |
As the car is secured by the loan, the lender has the right to seize the car if you default on payments. The interest rate tends to be lower because they are less risky to the lender. A secured car loan is quite common with a fixed interest rate. |
|
Unsecured car loans |
With unsecured car loans, the lenders have no collateral on the money borrowed. This type of loan is considered to be high risk for the lender. The interest rates tend to be higher, the lending criteria are often tighter and it can be harder to get approved. |
|
Chattel mortgage |
chattel mortgage is a common kind of business car finance. It is similar to a standard car loan however it allows you to claim the total GST amount from the purchase price on your next BAS statement, you can also claim interest, depreciation and running expenses. |
|
Hire purchase |
Hire purchase is a commercial finance product where you can hire the vehicle you need for your business from the lenders over a fixed term period. |
|
Car lease |
A car lease is a rental agreement which allows you to rent a car for a period of time. You will typically make monthly lease payments on the vehicle and can buy out your lease at the end of it. |
|
Novated lease |
A novated lease is a finance option where your employer pays for your car lease from your pre-tax salary. This is under a salary sacrifice arrangement. |
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The interest rate is a huge factor of your loan as it will determine your repayments. Before taking out a car loan, you should compare the interest rates offered by different lenders.
Depending on the age of the vehicle, you have the capacity to choose loan term up to 7 years. Bear in mind that the longer loan term helps lower the monthly repayment but will increase overall amount repaid on a car loan.
The loan repayments can be monthly/fortnightly or weekly. You can choose the repayment to fit in with your pay circle or with your budget.
Apart from the interest on a loan, there will be extra fees and charges involved such as establishment fees, monthly keeping fees, discharge fees, etc. They vary from lender to lender, so ensure you understand what these fees are.
Some lenders provide the balloon payment option to those who want to reduce their monthly repayments. A balloon payment is basically a lump sum amount you have to pay once the loan term ends. This lump sum amount can either be paid in full or refinanced.
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