The Pros And Cons Of A Car Loan

Tossing up whether or not to take out a car loan? To help make your decision easier we have compiled a list our pros and cons of a car loan.
No obligation. It won't affect your credit score.

Last updated on May 4th, 2022 at 04:41 pm by Bill Tsouvalas

Pros & Cons of a car loan

PROS

Purchase a car with no money down

The most obvious benefit of a car loan is that you are able to purchase the car without having to pay anything upfront. 100% financing is common practice. Most people do not have the necessary savings to pay for a car in full or would prefer to use their savings for something else. (house deposit, investments etc)

Credit History

A car loan also allows you to build and improve your credit history. So long as you pay your repayments on time you will see your score increase. Building a good credit history will benefit you with future financing requirements such as home loan.

Low Rates

Secured car loans come with very low rates, meaning that over a typical 5 year term your total interest over 5 years might be only a few thousand dollars, obviously this all depends on loan amount and price of the car you are purchasing. Due to car loans being secured by an asset, car loan rates are close to home loan rates, which is quite different to unsecured products like personal loans, credit cards and the like.

Tax deductions

If you are purchasing the car for business use, the interest payable as well as running costs of the car can be tax deductible. The portion of the costs you can claim depends on the business used percentage.

Establish a good credit score

There is a legal requirement for all dealers selling used cars as a business to be licenced. You could always buy a used car from a private seller of course, but you won’t have the same protections (e.g. warranty).

CONS

Interest and fees

You will pay interest and some fee’s compared to paying it outright with cash, but rates are quite reasonable, making car loans an attractive offer.

The bank effectively owns your car until your last payment

As the car is secured by your loan, your car could be at risk of being repossessed by the lender if you fail to make repayments and default on your loan. If in the rare case this happened it could negatively impact your credit history.

Depreciation

Cars depreciate in value over the period of the loan. The rate of depreciation may depend on the type of car it is. In some cases, the amount you are still owing is higher than the market value of the car. This can become a problem if you want to upgrade mid-term as you will need to cover any gap between what’s owing to the finance company and how much you received from the sale of your car. If there are no plans to upgrade mid-term than this won’t apply.

Top Tips on how you can get the best car loan

Get your house in order

Your credit history might have an impact on the interest rate and the amount you can borrow, so the first thing to do is to tidy up any finance-related issues. For example, consider paying off any defaults or credit cards that affect your credit history. Also, make sure you have good bank statement conduct, this means no regular overdrawing, excessive gambling debits and the like.

Understand your affordability

It is important to understand how much you can afford realistically. An online car loan calculator can help you roughly crunch the numbers. Take into account your other outgoing expenses to work out a comfortable loan term with the repayment amount you can afford. The longer the loan term is, the lower the repayments will be.

Compare your options

You have several options when looking to finance a vehicle. You can search for lenders online, enquire at the banks, or go straight to your dealer. Take your time to do the research and evaluate the quotes to find out which one suits you best. Try to avoid too many credit enquiries as they can have a negative impact on your credit score. If you don’t want to sort through the options yourself, contact a finance broker who can compare and find the best options for yo as they usually have a large panel of lenders under the one roof.

Which type of car loans are available?

Loan Type
Secured car loans

As the car is secured by the loan, the lender has the right to seize the car if you default on payments. The interest rate tends to be lower because they are less risky to the lender. A secured car loan is quite common with a fixed interest rate.

Unsecured car loans

With unsecured car loans, the lenders have no collateral on the money borrowed. This type of loan is considered to be high risk for the lender. The interest rates tend to be higher, the lending criteria are often tighter and it can be harder to get approved.

Chattel mortgage

chattel mortgage is a common kind of business car finance. It is similar to a standard car loan however it allows you to claim the total GST amount from the purchase price on your next BAS statement, you can also claim interest, depreciation and running expenses.

Hire purchase

Hire purchase is a commercial finance product where you can hire the vehicle you need for your business from the lenders over a fixed term period.

Car lease

car lease is a rental agreement which allows you to rent a car for a period of time. You will typically make monthly lease payments on the vehicle and can buy out your lease at the end of it.

Novated lease

novated lease is a finance option where your employer pays for your car lease from your pre-tax salary. This is under a salary sacrifice arrangement.

What do you need to consider when applying for a car loan?