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The essential guide to financing a car in Australia

05 May 2021

Financing A Car

Buying a car is an exciting decision and a major investment. It’s an investment that requires research, legwork, and number-crunching – to ensure you can afford both the car and its running costs.

If you can’t afford to buy your new wheels outright, you could consider car finance. Car finance is a type of personal loan which requires you pay off your car with monthly, weekly or fortnightly repayments.

While financing a car might sound simple, not all car loans are created equal. It’s a good idea to shop around for the best loan deal before you even enter a dealership. It could save you money and ensure you can pay off your car more quickly.

Why financing a car comes before buying it

Like any major purchase, buying a car can be a real head-or-heart decision. It’s easy to walk into a dealership and fall in love with something that’s already $10,000 over the vague budget you had in mind! And, if that happens, you may find yourself in trouble financially down the track. Maybe the dealership’s car finance plan isn’t the best deal but how would you know if you haven’t researched any other options? What can you really afford to repay and is another few thousand going to break the bank?

Start by figuring out what you want to spend on a car and finding out what you can borrow. If you’re buying new, your car starts depreciating as soon as you drive it out of the dealership, so don’t spend more than you should – it just won’t be worth it in the long term.

The next step is to shop around for the best loan – but don’t be afraid to hit the phones and talk to lenders, too, to make sure you understand all aspects of the loan. Using a car loan calculator can also help you figure out what you need to budget for each month. Make sure you get pre-approval – it locks you into a budget, but also can give you negotiating power when you get to the car dealer.

Types of car loans

There are typically two types of car loans – secured and unsecured loans. Most car loans are secured, which means the car becomes the security. If you don’t make the repayments on time, the car can be repossessed and sold so the lender can recoup its money.

Unsecured loans are available too. You don’t have to offer up your car as security, but you may have to pay a higher interest rate on the loan.

Also, be aware of variable and fixed interest rate loans. If you opt for fixed, which are usually offered at car dealerships, your car loan repayments will be the same each month. If you opt for a variable rate car loan, your repayments may fluctuate, but there usually won’t be an early exit fee to pay the loan off early. Think about what suits you and your circumstances.

You might also be considering buying a car as part of your business? There are a number of different car finance options you might like to consider if you find you're in this scenario.

Comparing car loans

So many loan products… how do you choose which one is right for you? Well, you’ll want to compare loans by assessing the following things:

  • The loan term This is the length of the loan – many car loans are 1-7 years long.
  • The comparison rate This is a figure for the loan that includes interest rates and fees, and you want to make sure when you compare that the loan amount and terms are the same.
  • The interest rate This is the rate you’ll pay on the amount you’re borrowing.
  • Any fees and charges Look at the application fee, early exit fees or other fees or charges you may be up for. Also, can you make extra repayments, without penalty, to pay the loan off faster? Check all of these things with the lender before applying.

Other costs to consider

Don’t forget that when buying a car, you’ll have to factor in registration, insurance, running costs and stamp duty.

While some lenders will offer to bundle these costs as part of your car loan, you’re better off paying for them upfront with other funds – you’ll save on paying interest. Don’t take the insurance products dealerships often try to sell you, without researching your own to get the best deal. 

Buying a car – whether it’s new or used – can be exciting, but it’s essential to do your research first, know what you can afford and get approval on loan first. Happy car shopping!

This information is general in nature and has been prepared without taking your objectives, needs and overall financial situation into account. For this reason, you should consider the appropriateness of the information to your own circumstances and, if necessary, seek appropriate professional advice.

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