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What is a car loan?
A car loan is a type of personal loan used by consumers to purchase a vehicle. Depending on the lender, these loans can range anywhere from $10,000 to $100,000 with varying repayment terms.
Most Australians will, at one point in their life, look to purchase a new or used vehicle. While some of us shrewd savers may be able to afford a vehicle out of our savings, most Aussies will need to look to financing their purchase.
Monzi is here to explain how car loans in Australia work, as well as show how our lender-finder service may be able to help you.
How do car loans work?
In general, car loans are an agreement between three parties: the consumer (you in this case), the seller (car dealership, private sale, etc.), and the credit provider (banks or other lenders).
In short, the credit provider pays the dealer on your behalf, and then you repay the lender over the coming months or years. Moreover, the car loan process looks a little something like this:
- You and your credit provider reach an agreement over the amount of money required for the purchase.
- You and the seller reach an agreement by signing a contract.
- The lender pays the seller.
- The consumer makes repayments over the agreed-upon term, generally a period of several years.
While in general, the vast majority of these loans are secured by the car you purchase, some lenders may offer unsecured loans.
This is a very brief summary of how these loans work. We’ll explore all of this more in-depth below.
What are my car loan options in Australia?
It’s no secret that every Aussie is different. Moreover, our choices in vehicles reflect this. While some of us prefer a mud-splattered 4WD beast, others prefer a small hatchback for their inner-city commute. Luckily, we’re afforded the same variety when it comes to our financing options.
In short, there are a number of different options potentially available to you in Australia. For example, you may be able to finance a new or used vehicle through one of the following:
Dealership finance
You may be able to finance your vehicle from the options provided by the dealerships themselves; examples include Toyota Finance, Nissan Finance, etc.
Dealership finance may offer lower interest rates than traditional car finance on selected makes and models. Moreover, you may reduce your regular repayments by making a balloon payment at the end of your term. Dealership finance may be an attractive and convenient option for Aussie consumers as they do not have to shop around.
Despite the convenience, there are a number of risks associated with dealership finance. For example, the balloon payment at the end of your term may be large and difficult to save for. Moreover, this type of finance may only be available to consumers with good credit scores.
In other words, dealerships may not be able to offer bad credit car finance. Get in contact with a dealer directly for more information. Learn more about loan against my car that is paid off here.
Car loans
The other way to finance a vehicle is through a car loan. Depending on your situation, you could potentially get a loan from your bank or an alternative lending option.
With a vehicle loan, the consumer receives a lump sum payment which is used to purchase a vehicle. Moreover, the vehicle is often the security against the loan. This means if you default on your secured loan, you risk losing your car.
In general, a personal loan offers consumers more variety than dealership finance. Consumers can choose a product from a credit provider that suits their situation, needs, and objectives.
Bear in mind, it may be difficult to secure approval for vehicle finance from your bank if you have poor credit. Luckily, the myriad of alternative lending options may be able to help.
Finally, note that personal loans for cars can vary greatly in their rates, terms, and charges. For example, lenders offering bad credit car loans will likely charge higher rates than traditional loans. In other words, you are unlikely to get the best car loan rates if you have poor credit.
Is it worth financing a car?
It may be worth financing a vehicle if you do not have the savings on-hand to afford it otherwise. Moreover, financing your car purchase with a loan may be worth it if:
- your requirements and objectives are met; and
- you are able to reasonably afford your regular repayments.
Ultimately, however, there are too many variables at play to provide a definitive answer.
In short, every Aussie consumer has their own needs, objectives, and financial situation. Moreover, each lender may vary in their eligibility criteria and assessment processes. Therefore, it is essential you compare your options before making a decision.
How do I compare car loans?
When comparing your finance options, it’s important you understand what to compare. In short, there are a number of different points to consider that will impact how much you get out of your loan.
Consider the following before applying for loans.
Interest
Interest is what you repay on top of the loan principal. In general, this is expressed as an annual percentage rate (APR) of the loan principal. The lower your rate, the less you will pay in interest.
The interest rate is often the first point consumers consider when comparing lenders. Indeed, comparing loans based solely on the advertised rate may be tempting. After all, the interest will have a major impact in the total cost of your loan, right?
While this may be true, consumers should dig a little deeper than simply the advertised rate. In short, there may be other loan features that you find attractive.
