The best ways to finance a car in Australia

What’s the best way to finance a car purchase in Australia? Joshua Sale, Canstar’s Ratings Manager, shares some options for you to consider before you get behind the wheel.

Whether you are looking to pick up a cheap and reliable used car, need a work vehicle, want to switch to a hybrid or electric model, or are keen to splurge on a luxury brand, the process of buying a car can be challenging, as well as fun. Once you’ve chosen the perfect make or model, there’s car financing to consider, as well as choices like whether to buy secondhand or new, and from a dealer or privately.

In this article, we share options for financing a car, plus some tips on what to think about before you sign on the dotted line and pick up the keys to your wheels.

How can you finance a car?

Different options to pay for or finance a new or used car include:

• applying for a car loan
• applying for a personal loan
• a hire purchase agreement
• salary sacrificing (a novated lease agreement)
• redrawing on your home loan
• using your savings

Based on the type of car you are after, you might need to consider the luxury car tax and may be interested in the top-selling new cars in Australia right now. We also have a five-step checklist if you want to buy a used car.

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What should you consider before buying a car?

Outside of buying a house, buying a car is one of the biggest purchases many of us will make in our lifetime. So, how can you save money when it’s time to secure a new or used car? While a good general rule of thumb is to avoid using debt to buy depreciating assets (such as motor vehicles), using finance still remains the most common way that Australians purchase vehicles. And even if you do have the spare cash lying around, it’s always a good idea to understand your options, because for some, there might be exceptions to this general rule.

How long does it take to save up to buy a car?

Paying in cash may be a good option to finance a car, depending on your personal financial situation.

If you’d like to buy a car in cash, Canstar research suggests it would take 21 months to save up for a new car that costs about $25,000, based on the average Australian full-time yearly income of $92,030 and depositing 20% of after tax monthly income (Medicare levy applied) into the average bonus savings account (3.27% p.a. at the time of writing) every month.

Looking for a more expensive car, then after 24 months (two years) saving at the same pace you would have $29,802.

We’ve assumed income tax and the Medicare Levy being applied to the average annual income and savings account interest earnings, as per 2022/23 rates.

Is it worth salary sacrificing a car?

Salary sacrificing with a novated car lease may be worth considering if you’re in the market for a new car. But keep in mind that if you take out a novated car lease, you don’t actually own the car – you are just leasing it.

‘Salary sacrificing’ a car involves a three-way agreement between you, your employer and a finance company. Basically, you ask your employer if it will agree to make lease repayments on a car using your pre-tax salary, and if the answer is yes, you can take out the lease with a finance company. This company might be chosen by your employer, who’ll assume responsibility for making lease repayments directly to this company for you, and for paying fringe benefits tax (FBT).

ASIC’s Moneysmart says repayments on a vehicle through your pre-tax salary can reduce your taxable income, which may lower how much tax you pay each year. The Australian Taxation Office (ATO) states that GST doesn’t apply to novated leases in the same way as it does to other types of car purchases either, so you might have a lower purchase price for the car than if you bought it outright.

There can be some drawbacks with taking out a novated car lease too. For example, a residual value may be owed at the end of a lease, there can be higher interest rates and admin fees that apply, and you could be liable for the car if you lose or change jobs.

Taking out a car or personal loan to buy a car: is it a good idea?

As I’ve mentioned, avoiding using debt to buy depreciating assets such as new motor vehicles can be a good idea. But, there can be pros to taking out a car loan or a personal loan to buy a car. Borrowing money for a car can give you access to a vehicle straightaway, and you might need this. Making regular repayments on a car or personal loan could also improve your credit score. This might be helpful when you look to make a future major purchase such as buying a home, if you’ll need a home loan. But missed repayments or making multiple loan applications in a short space of time could negatively impact your credit score, so keep this risk in mind too.

If you are considering taking out a car or personal loan, ensure you consider the Product Disclosure Statement (PDS) and Target Market Determination (TMD), before making a decision. You can contact the product issuer directly for a copy of the PDS and TMD.

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Secured vs unsecured loans

There are the options of taking out a secured or an unsecured loan, with the car that’s being bought often being used as ‘collateral’ for a secured car loan. The interest rate that a lender agrees to give you on a car loan or personal loan can vary, and your credit score may impact both the interest rate and whether or not you get approved for a loan. Whether your loan is secured or unsecured can also impact the interest rate. You can find out more about interest rate ranges for personal and car loans, plus discover Award-winning lenders based on analysis by Canstar’s Research team.

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Should you consider dealer finance?

If you want to buy a car through a dealership, having a car loan approval in your pocket when you walk in could come in handy. It may allow you to focus on what you are there to do: pick out a car and get the best possible price for your purchase.

Dealer finance is a common way a new car is financed, and the convenience factor of using a car dealership as a ‘one-stop-shop’ clearly has some appeal.

As a car buyer, it’s important to be realistic and pragmatic. Car dealers need to make money somewhere – either on finance or on the sale price of a car. Often, dealers will be able to lure in new buyers with sharp interest rates, but these rates won’t necessarily be available for the car that you have your eyes on. Also, if you’re relying on the dealer for finance, it may limit your ability to negotiate or shop around for a better price on your new wheels.

It’s worthwhile, too, to watch out for additional fees that are likely to drive up the overall cost of a loan. Establishment fees and dealer agency fees can apply with dealer finance, and may quickly add up, even into thousands of dollars. Don’t be lulled into thinking that the cost of a loan stops at a low interest rate.

It can be challenging, at times, to find out all of the details of what’s involved with a ‘dealer finance’ offer until you are with a salesperson in a car dealership. Take the time that you need to read any fine print, and be diligent in comparing all of your car financing options.

Green loans

Green loans are a type of credit that’s offered on the basis the loan is being used towards an environmentally-friendly purchase, such as green products for your home or to buy an electric or hybrid vehicle. Some lenders may offer you a competitive interest rate for an electric vehicle (EV) with a green loan – in some cases cheaper than what you could get with a different car – but it’s always worth reading the fine print. You might still find a better deal elsewhere. You can compare car loans from a variety of lenders on Canstar’s database, plus find out more about hybrid cars that are available in Australia.

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The best way to buy a car for your business

The best way to buy a car for your business may vary, depending on your business and your personal circumstances. There can be tax advantages to buying a car for your business, if you need one, using ‘temporary full expensing’ (TFE) to purchase a motor vehicle such as a ute, delivery van or most cars, with a deduction capped at $60,733 for the 2021/22 financial year, according to the ATO. Canstar has a separate article on the instant tax write-off, if you’d like to find out more.

Additional reporting by Jacqueline Belesky

Cover image source: By Taras Vyshnya/Shutterstock.com