Car finance options

Understanding the ways you could finance a car, before you commit, will help put you in a better position to choose the right option. And what’s right for you will depend on your current financial situation, as well as what’s important to you.

So here’s a rundown of the main types of car finance used in Australia, when the car is primarily for private use.

As always, if any deal looks too good to be true, it probably is. Always check the fine print carefully.
 

• Car Loan (secured)
• Unsecured Loan
• Credit card
• Use your mortgage
• Dealer finance
• Novated Lease (salary sacrifice)

 

Car Loan (secured)^{^^}

These loans are available through banks, building societies and credit unions. They are ‘secured loans’, meaning you offer the car you’re buying as security against the amount borrowed. The advantage of this is the interest rate – which is usually lower than for a comparable unsecured loan from the same lender (if available).

They may also let you choose the term and how often you make repayments (to synch with how you’re paid), while Westpac’s Car Loan even includes an automated car history check.

While secured car loans are available for new or used vehicles, there may be limits on the maximum age a car can be.

Pros

• Usually a better interest rate than an unsecured loan – by offering your car as security
• Borrow for the full amount of the car – no deposit required
• Clear timeline of your repayments and when the car will be paid off
• Flexibility in repayment options to work with when you’re paid
• With a Westpac Car Loan
  • You may be able to borrow a little more to cover other expenses, such as a home charging setup, insurances, or something else.
  • You’ll get an automatic, complimentary history check to ensure there’s no finance owing or it’s never been written-off or stolen
  • Funds can be sent electronically to finalise purchase and for added security.

Cons

• Not available if you’re buying an older car (must be less than 7 years for Westpac) 
• There will be other pre-requisites for the car you’re buying (e.g. with Westpac the car must also be comprehensively insured, never written off and imported through official channels) 
• Car could be repossessed if you’re not able to make repayments.

 

Unsecured Loan

Also available from banks, building societies and similar lenders, these are multi-purpose loans – often called ‘unsecured personal loans’ – that don’t require you to offer any security. They offer good repayment flexibility and the costs are laid out clearly so there aren’t surprises. These loans, including Westpac's Unsecured Personal Loan, are a good option for cars that don’t qualify for a secured loan, or for people who don’t want to offer a car as security.

Pros

• For any type of vehicle – a good option for cars that don’t qualify for a car loan
• You don’t need to offer your car as security
• Funds can be sent electronically to finalise purchase and for added security
• No need to provide the car’s details means a less involved application process than secured car loans 
• Flexibility in repayment options – to suit when you’re paid
• The value of the car doesn’t determine how much you could borrow.

Cons

• Interest rate is generally higher than a secured loan (see Car Loan) from the same lender.

 

Credit card

Yes, some people do look at buying a car with a credit card. And in certain circumstances that mightn’t be a terrible idea – especially if you can find a card with an introductory deal with a low interest rate on purchases. But as credit cards have much higher interest rates and no set repayment schedule, you’d need to be confident you could repay that amount on time. 

Pros

• It’s a fast way to buy if you already have a credit card – perhaps good for a caryard ‘bargain’
• If you have a rewards card, you could also earn points on that purchase.

Cons

• If you plan to use a card you already have, your available credit limit might not cover the cost of purchase
• You could end up with large interest payments to make if you can’t repay the purchase before interest is due
• You can’t use this for a private sale
• Thinking of getting a cash advance on your card? Remember the interest rate for cash advances can be much higher than the regular rate, and is charged from the day you withdraw the cash.

 

Use your mortgage

If you already have a home loan, the logic of this sounds good. Use the money sitting in your offset account to pay for the car, because the interest rate of the home loan (or your mortgage) is often lower than other finance options. However, there are some important considerations. To start, you need enough money in your mortgage offset account or redraw facility before you can consider it. Then, you also need to manage the repayments carefully – borrowing with a lower interest rate repaid over a longer term could still cost more than a higher rate over a shorter term.

Pros

• A lower interest rate than other finance options
• Generally faster access to the money – provided you have enough available in the account.

Cons

• Requires discipline. To see the benefit of lower interest charges, you might need to repay the car’s value over a shorter period of time than the home loan term
• If you’d like to redraw against your home loan (rather than use an offset account), note some home loans require redraw approval and charge a fee for the service.

 

Dealer finance

All dealers and car manufacturers offer some type of car finance. And for some car buyers, this can be an excellent option. The dealer does all the work, you simply bring the required documentation, sign away and drive home. And while many see as the easiest way to finance a car, it’s likely you’re paying more for that benefit.

That’s because when dealers manage all aspects of the sale, they can often make the loan seem more competitive than it really is. A quick search online will reveal some of the techniques. One is to bump up the cost of the car, to offset the ‘low-rate’ finance on offer. Alternatively, offer a low rate and low repayments up-front, without making clear the size of the ‘balloon payment’ at the end of the loan term.

Balloon payments? They’re a lump sum payment that needs to be made at the end of the scheduled term for some types of finance. Usually determined as a percentage of the car’s value, this lump sum includes part of the principal (allowing for lower regular repayments), plus the interest charged on it throughout that loan’s term. Many people are caught out by this payment, as it can negate savings made earlier on.

Trade-ins are also a negotiating tool a dealer can use to their advantage. By offering you a ‘package’ that includes the trade-in of your current car, the real figures can be difficult to work out. What’s more, dealer trade-ins are consistently offered at a lower value than you could get in private sale.

Pros

• One-stop-shop convenience. A dealer can do it all for you, including getting rid of your old car. Apart from having the cash to hand, it’s often seen as the easiest option for the customer.
• Many offer lower repayments up-front followed by a large balloon payment, which could work well with some people’s cash flow.  

Cons

• Lack of transparency. The more you hand over for the dealer to do, the less you’ll know about what you really are paying, and what you could be paying instead. As the saying goes – there’s no such thing as a free lunch.
• Cost. When you calculate the full costs of dealer finance, it’s unlikely to be cheaper than that of a personal loan through a bank, building society or credit union. You’ll have to weigh up the value of the convenience.
• Lack of control. Many of these finance contracts offer little flexibility with your repayment schedule
• You still need to bring the same documentation as you would for a car loan or personal loan

 

Novated Lease (salary sacrifice)

If you’re a salaried employee, a novated lease may also be an option. In this arrangement, a regular deduction is taken from your pre-tax salary to cover the lease cost. As a result, your pre-tax income is lower, and you would potentially be liable for less tax. At the end of the lease term there will be a residual value (balloon payment) owing. You can choose to pay that residual so you own the car outright, take out a new lease on the same car, or upgrade to a new car, new lease. 

Pros

• Making payments from your pre-tax income could potentially lower your tax liability
• In many instances you can choose to have all the vehicle’s running costs – registration, insurance, fuel and maintenance – covered by the lease, or deduct them separately from your own pocket
• You might also avoid paying GST on the car’s purchase price, because to the ATO, the car is considered part of your salary
• You can choose to buy the car outright, renew the lease or upgrade to a new car at the lease’s end
• No up-front costs – you simply take delivery of the car and have an amount deducted from your pay moving forward.

Cons

• You don’t own the car, you lease it. So at the end of the lease period, you still don’t own a car
• The residual/balloon payment required at the lease’s end can be substantial
• Other administration costs may be factored into the lease’s cost
• There are restrictions on what you can do with the car (mileage, modifications) 
• There can be hefty penalty costs if you break the lease agreement
• More expensive overall than buying outright.