Co-author: Regina Collins
What is a car loan?
A car loan is a loan taken out for the purpose of buying a motor vehicle such as a car, Ute, 4WD, motorbike, or other road vehicle. A car loan can also be called a vehicle loan. If you don’t have enough in savings to afford to buy a car but you can afford to repay a loan in monthly instalments, you might consider using a car loan to finance your new wheels.
A car loan is a common type of personal loan. Personal loans, as a category, cover a much broader range of loans (e.g. debt consolidation, home improvement, study costs, weddings), so we here at CANSTAR compare personal loans separately on our website.
There are two main types of car loans, and these include:
- New car loans
- Used car loans
Why consider taking out a car loan?
Some of the pros and cons of car loans are worth thinking about before deciding whether or not a car loan is the right decision for your financial circumstances.
|Advantages of a car loan||Disadvantages of a car loan|
How to choose the right car loan for you
1. Loan amount: how much do you want to borrow?
Stick to the amount you want to borrow and resist the bank’s offer to sell you more credit. You made a budget for a reason, and you don’t want to end up in debt or paying too much interest because the loan is either bigger than your budget or your needs.
Keep in mind that your car is a depreciating asset. The value of your car is going to decrease over time – possibly as soon as you drive it out of the showroom. So whatever you do, don’t overextend yourself financially, or you could end up owing a lot more than your car is worth. Just because you could borrow a certain amount of money, doesn’t mean you should.
Remember to factor in fees and charges when calculating your budget, especially sneaky application fees. Always be sure to read the product disclosure statement (PDS) before making a purchase decision as other fees may not be listed on the website or hidden away. On average, 1 in 3 of Australians surveyed by CANSTAR Blue said they had been hit by unexpected bank fees or charges.
John found it pays to shop around
John went into a car dealership to look at a red sports car. He went for a test drive and decided he just had to have the car. He got all the optional extras and then the car salesman arranged a loan for him. Richie drove away from the dealership with a loan for over $45,000 and an interest rate of 22% per year. When he got home he spoke to his dad and realised he had paid way too much for the car and the car loan was very uncompetitive.
It’s important to consider important payment factors such as rent or mortgage, petrol, food, bills and monthly repayments on your car loan. Try planning ahead for things such as unexpected medical expenses and unpaid leave. Use our free Car Loan Repayment Calculator to factor in how much a car loan would add to your current expenses.
2. Loan Term: How quickly can you afford to repay the loan?
Shorter loan = higher monthly repayments. Longer loan = lower monthly repayments but more interest being accrued. You should aim to choose the shortest loan term that you know you can comfortably afford.
Make sure there is no penalty fee charged if you repay your loan early. Most lenders don’t charge one, but those who do charge fees ranging from $20 up to $800!
3. Secured or unsecured?
Secured loans give you a lower interest rate but there’s a risk of losing the property you choose to use as security if you don’t meet your repayments. Unsecured loans have a higher interest rate so you might end up paying more in interest over the life of the loan.
Whether your loan is secured or unsecured, make sure you never miss a payment. A missed payment is a serious default and can put a black mark on your credit report, making it more difficult for you to get any credit or loans in the future. You must make every single one of your monthly repayments or you could lose the car (with a secured loan) or face court action (with an unsecured loan).
4. Shop around:
If you want a car loan that helps YOU, not just your bank, you need to set up a game plan before you apply. The majority of Australians – 59% of people surveyed by Canstar Blue in 2016 – say they are more likely to take out financial products such as loans with the institution they usually bank with. But you should always compare car loans to find the best loan for your situation.
Look for a great value loan that suits your needs. Compare car loans on our CANSTAR website or read our most recent personal and car loans star ratings report for more information.