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How to get a car loan

By David Bonnici, 15 Jun 2020 Car Advice

car loan

There’s more to financing a car than punching numbers into a loan calculator and signing on the line

There are several ways to get quick finance for your new ride such as bank loans, factory finance or car leasing, but the numerous options may be confusing.

But understanding which financing deals work best for your particular circumstances is as important as negotiating the final price of the car - perhaps even more so.

After all, there’s no point researching and bargaining hard to get the best purchase price on a vehicle if your repayments end up costing hundreds more than they should.

Here’s everything you need to know to secure the best financing option once you’ve found the right car at the right price.

CAR LOANS

This option is where a bank or other financial institution gives you the full sum of money required to buy the car which is then paid back with interest over an agreed period, usually three to five years. The advantage of a car loan is you can get pre-approval so you’ll know how much you’ll have to bargain with.

There are different types of loans for buying cars, including:

Fixed rate:

Where you lock in the interest rate for the term of the loan so you know exactly how much you’ll need to repay.

Buying a car

Variable rate loan:

The interest rate will change with the market, which is good should there be a reduction in the national rate as you’ll be paying less in interest as part of the repayment. This is more common with home loans taken out over much longer periods. Of course, there’s the risk the interest rate will increase with a corresponding increase in the amount you have to repay each month.

Read next: Mazda’s new way to buy one of its cars

Secured loan:

This is where the car you buy is used as surety, meaning the financier can repossess the car should you be unable to repay the loan thereby protecting their investment in the deal. If the car is worth less than the sum owing, you will also be required to pay the difference. The advantage is that secured car loans generally have lower interest rates than personal loans.

If you are certain you won’t have trouble making regular payments on time for the life of the deal, secured loans can be a great option.

Unsecured loan:

These are personal loans that don’t require the car as surety. They’re usually for used cars as you generally won’t be able to borrow as much as with a secured loan. Because the bank is taking a bit more of a risk the interest rate is usually a little higher than with secured car loans.

Mortgage redraw:

If you owe less on your home loan than your house is worth, you could borrow against the balance, or equity, to buy a new car. The advantages in this deal are you just have one regular loan repayment at a low home loan rate and it’s easier to set up than if organising a new loan. 

You can also stretch out the period of the home loan so your monthly payments remain the same. However, as well as increasing the size of debt, compound interest calculated over the longer period means it could actually cost more than a separate car loan, though this can be offset by making extra repayments. 

Be sure to factor in any additional costs such as redraw fees if you’re considering borrowing cash against your home loan.

Read next: Too many Australians are crippled by car debt

car loan documentation

DEALER OR FACTORY FINANCE

These are car loans arranged by the car dealers that are underwritten by the car manufacturers or third party financial institution. Sometimes these will have very-low or even no interest; however this will often be tied to you having to pay more for the car meaning you don’t necessarily save in the long term.

This type of finance may be very attractive especially at the point of sale when the prospect of paying zero interest can be too good to resist. But it’s always a good idea to take some time to run the numbers and work out if paying less for the car upfront and a little more interest makes more sense.

BEFORE YOU BORROW

Shopping around for the best loan is as important as shopping for the best car price. Most people look for the lowest interest rate, however it’s more important to focus on the full repayment figure, which is influenced by other factors such as fees and repayment options – most car manufacturer and financial institution websites have loan calculators to help you compare.

Finding a good car loan calculator is a great place to start. As is establishing your credit rating - another simple step that can avoid disappointment later and once you’ve already set your heart on a car.

Other important things to consider:

Make sure you’re aware of all loan establishment and service fees, and if there’s an early termination fee should you pay out the loan early.

Speaking of which, find out if there's an option to pay more frequently or occasional larger repayment chunks as this will help pay off the loan quicker. If you get a windfall of cash, paying off the loan sooner could save you interest, depending on the loan conditions.

picking up your new car

And on the flip side, make sure you have a little wriggle room in your repayments. Your financial situation may change without warning and that could put you in difficult position if you’ve been living ‘hand-to-mouth’ or putting a majority into servicing a loan.

Bear in mind the complete cost of car ownership when you are considering how much you can borrow. The cumulative running costs of servicing, rego, insurance, fuel and other maintenance can be significant.

Read next: What if I can’t afford to pay my car loan?

LEASING

It’s also possible to get into a new car without actually buying it at all. Leasing is essentially a long-term rental with regular payments which include the running costs and maintenance. At the end of the lease period the car goes back to the lender. 

Most lease agreements allow you to buy the car at the end of the lease period but the final balance, combined with all the payments you made normally eclipse the car’s actual value when new.

Advantages of leasing include being able to make claims for taxation purposes should you use the vehicle for work. You can save on taxation by arranging the payment to be taken from your pre-tax pay (salary sacrificing) which means your taxable income is less.

Like a car loan, all costs are calculated in advance and agreed on in a contract. 

There are three leasing options:

Novated lease:

This is the most common arrangement for salaried employees who want the tax benefits of salary sacrificing lease payments. By reducing your taxable income, the money that would have been taxed can be put toward a more valuable car. A novated lease is arranged between the employee, the employer and a financier and is generally simple to set up. What’s more, the deal can be set up to include a full maintenance package to give you a better idea of overall running costs from the start.

signing car contract

Finance lease:

This is a common option for vehicles used primarily for business. Under the agreement, the vehicle belongs to the financier and is rented out to the borrower for monthly instalments. 

This generally involves a fixed monthly lease payment and a residual amount payable at the end of the term, should you want to keep the car. As the borrower you can choose the actual vehicle from your choice of car dealership and negotiate the price with the dealer just like you would if you were buying a car in the conventional sense.

Operating lease:

This option is similar to a finance lease but the borrower does not take on the obligation to pay the residual value. The vehicle itself is merely handed back to the financier when the lease expires.

FINALLY

Just because you’re looking to either lease a vehicle or buy one using a loan or another form of finance, it doesn’t mean you can afford to neglect the usual rules that apply if you’re buying a car with cash.

Read next: How to test drive a car

Do your research, drive hard for a bargain and, always check a used vehicle for any existing finance that’s outstanding. If there’s anything you don’t like the look of in a vehicle or loan agreement, take time to think about it and, if you’re still not satisfied, keep shopping.