Whether you're buying it new or used, buying a car is a big deal! It’s a major financial decision, and for most people, it’s something they can't afford to pay for outright, so they turn to car financing instead.
Car financing in Australia can take many forms—the most typical is taking a car loan from a bank or car dealer (aka dealer financing). You’ll then pay it monthly for the next few years. Other options include using a credit card, taking a personal loan, or borrowing from friends or family.
Car financing in Australia can be overwhelming, at first glance, even intimidating if you go over the financial terms—but don’t worry. This guide will help you understand how it works and what to look for as you look for the best options to buy the car you want.
There’s a lot to unpack, so let’s get started.
How Does Financing a Car Work in Australia?
Here's the first thing you must understand about car financing in Australia:
Car financing means borrowing money to buy a car now so that you don’t have to spend months or years saving money to buy it.
But why would that be necessary?
The reality for many regular car buyers like you and me is that we don’t have stacks of cash ready to pay for a new vehicle. With that reality is that we immediately need a car to go to work, take our kids to school, and carry out other daily activities.
For most people, it’s not practical to spend months or years saving up to buy a car with cold cash, especially when they need to get around for their daily routines.
Besides, the longer it takes you to save money, the higher will cars’ prices go.
It won’t take a genius to understand how car financing bridges that financial gap to help people buy the cars they need.
How Car Loans Work
The most common form of car financing is to take out a car loan from a bank or an auto dealer.
These kinds of businesses will lend you the money you need, which you’ll gradually repay with interest until everything is paid in full. Only when that day comes do you become the owner of that car.
You'll have some flexibility in deciding how much time you want to pay back the car loan. The shorter the loan repayment period you choose, the larger your monthly payments. The opposite is also true—you can opt for a smaller monthly payment but for a longer payment period.
Of course, banks and dealers are earning an income from your car loan in the form interest and other fees that you'll have to pay on top of the principal amount you borrowed.
Car financing meaning and methods are pretty universal, so car loans work pretty much the same whether you’re in Australia, Japan, Malaysia, or anywhere else.
What’s a Down Payment on a Car?
As you shop around for a car and consider your car financing options, you’ll hear the term ‘down payment’.
What does that term mean?
A down payment is a portion of the car’s overall price that you pay upfront in cash.
In many cases, you can’t or wouldn’t want to get a 100% car loan (pay nothing upfront).
Instead, you might pay for a portion of the car with your personal cash and borrow the rest. For example, you might buy a new vehicle by:
- Paying a 20% down payment upfront
- Getting an 80% car loan to pay the rest
You’ll have some flexibility to decide how much down payment you’re willing to pay and how much of a car loan you want to commit to. Of course, your choice will depend on your financial situation, so it’s not the same for everyone.
Remember one thing: The larger a down payment you make, the less you pay monthly and the sooner you’ll own the car.
What Are the Different Types of Car Loans?
You’ll often find that car loans come in several different forms. Of course, some financial institutions will also market their car loans as unique products with special names, but that’s just a way for them to stand out from their competition.
Underneath the marketing hype, there are two types of car loans that you must understand:
- Secured car loans: These are the most common types of car loans you’ll find. They typically come with a lower interest rate because the car becomes the security for the loan. In simpler terms, the bank can take the car away if you don’t pay for the loan. That makes the arrangement safer for the bank, which is why they’ll charge you a lower interest rate.
- Unsecured car loans: This type of loan does not involve any collateral. So, unlike a secured loan, the bank can't take the car away if you don't make your regular payments. Naturally, this is a bigger risk for the bank or lender, which means you'll pay a higher interest rate.
Alternative Car Financing Options
Before committing yourself to a car loan from an Australian bank or car dealer, it’s good to know of other car financing methods.
After all, you can only make a well-informed decision once you understand all the options at your disposal.
Remember that at its core, financing a car means borrowing money to buy it. There are plenty of ways to borrow money besides going to a bank for a loan.
Still, everything comes with its fair share of pros and cons. So, you must always do your homework before choosing to take on a car loan or any of these alternative financing options.
Here are three other options for borrowing money to buy a car that doesn't involve car loans:
- Credit Card: It's possible to buy a car with a credit card if you have a high enough credit limit. Paying by card is much more straightforward, and you can earn plenty of credit card points or rewards in the process. The downside is that credit card interest rates can be very high if you take too long to pay off your loan.
- Personal Loan: Banks offer not only car loans but also personal loans. A personal loan isn't tied directly to the car you're buying. Instead, the bank gives you the cash you use to pay for the vehicle yourself. Naturally, the interest rates may or may not suit your needs.
- Friends and family: Lastly, you could borrow money from someone you know, like your friends and family. This approach might be more accessible and quicker, but it risks straining your relationships with the lender.
Again, everyone's circumstances are different, and each car financing option has its benefits and drawbacks. Take as much time as you need to evaluate all those factors before deciding.
Is Getting Finance on a Car a Good Idea?
Car financing makes it much easier for most people to purchase the vehicle they want or need. Yet is getting finance on a car a good idea compared to waiting a few months or years, saving cash, and buying the car outright?
Well, whether you plan on borrowing the money from the bank through a car loan or from friends and family, here are some benefits and drawbacks of car financing.
Pros of Getting Finance on a Car
- Little or no money upfront: Car financing allows you to get your hands on a car by paying little or no money of your own upfront. That means you can get a car immediately while paying for it slowly over several years.
- Build your credit history: Getting any car loan will help you build your credit history. Assuming you pay on time and in full, your credit score could improve with time and help you get future loans for housing or anything else.
- Affordable rates: You can find car financing rates that fit your needs, budget, and tolerance for debt. The lender can help you find a solution you’ll be pleased with.
- Tax deductions: Some of your payments could be used as tax deductions if you’re buying a ute or other vehicle for business reasons.
Cons of Getting Finance on a Car
- Interest payments: Car financing isn't free, regardless of how you get it. You'll have to pay an interest fee for that money, assuming you have a good credit score. Bad credit car financing typically involves higher interest payments, as the lender will consider you a higher risk for them.
- Fee payments: Besides interest, car financing also involves several other fees. For example, application fees, documentation fees, missed payment fees, and more.
- Risk of default: With car financing, you don't fully own the vehicle until you've paid the loan. Failing to pay the loan is called a 'default', affecting your credit score negatively. Getting car financing with bad credit after that will be much more difficult.
- Depreciation: Cars are a depreciating asset, meaning that their value goes down steadily over time. With financing, you'll gradually pay the initial purchase price even though the car isn't worth that much anymore.
What Is the Best Way to Finance a Car in Australia?
Every car buyer faces unique circumstances. So, there is no one-size-fits-all solution, and it’s not possible to say that one car financing method is necessarily the best over all others.
Instead, you’ll have to do some homework to see which option benefits you the most.
Here are five essential questions you must ask yourself when considering your car financing options:
- Interest rates: How much interest will this car loan charge me?
- Fees and charges: What are all the fees I’ll have to pay to enjoy this car loan?
- Monthly repayments: How much can I afford to pay comfortably every month?
- Payback period: How long do I need to pay this loan in full?
- Fines or penalties: Are there any fines for paying my loan early or late?
When you ask those questions and more, your goal is to find the car financing option that you can live with comfortably. Therefore, the financing option that fits that description will be the best one for you.
Here’s one helpful tool that you can use to compare your financing options. A calculator like that will help you figure out how much you’ll pay for the car and how much of it you’ll have to pay back monthly.
There are plenty of car loan calculators these days, so finding one isn’t hard. An excellent one to try out is the car loan calculator by the National Roads and Motorists’ Association (NRMA).
As you consider your car financing options, never forget that car financing is supposed to make your life easier and not unnecessarily stress you.
What Is the Car Finance Interest Rate in Australia?
The average car loan in May 2022 is around 5% for a new car, while used cars are financed a little higher at an average of 6%.
Still, the car financing industry is very competitive. So while Australian lenders will offer you interest rates that are more or less the same, some are still higher than others.
For example, the best car financing Brisbane has to offer won’t be all that different from the rates you’ll get in Perth.
Never forget to compare at least 2 or 3 lenders to see which one has the best offer. You can save quite a bit of money in the long run, even with a slight difference in percentages because the principal amount is significant.
For more information on the automotive world in Australia and beyond, check out our blog at CarpartAU. We update it daily to keep new articles available to you throughout the week.
By Ray Hasbollah