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The Pros and Cons of Car Loans

Tossing up whether to take out a car loan? Dive into the pros and cons of car loans right here with Savvy today!
Published on December 11th, 2020
  Written by 
Thomas Perrotta
Thomas Perrotta is the managing editor of Savvy. Throughout his time at the company, Thomas has specialised in personal finance, namely car, personal and small loans, although he has also written on topics ranging from mortgages to business loans to banking and more. Thomas graduated from the University of Adelaide with a Bachelor of Media, majoring in journalism, and has previously had his work published in The Advertiser.
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   Reviewed by 
Bill Tsouvalas

Reviewer

Bill Tsouvalas
Bill Tsouvalas is the managing director and a key company spokesperson at Savvy. As a personal finance expert, he often shares his insights on a range of topics, being featured on leading news outlets including News Corp publications such as the Daily Telegraph and Herald Sun, Fairfax Media publications such as the Australian Financial Review, the Seven Network and more. Bill has over 15 years of experience working in the finance industry and founded Savvy in 2010 with a vision to provide affordable and accessible finance options to all Australians. He has built Savvy from a small asset finance brokerage into a financial comparison website which now attracts close to 2 million Aussies per year and was included in the BRW’s Fast 100 in 2015 as one of the fastest-growing companies in the country. He’s passionate about helping Australians make financially savvy decisions and reviews content across the brand to ensure its accuracy. You can follow Bill on LinkedIn.
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In this article

Buying a car is one of the big financial steps you’re likely to take in your life, but the upfront cost can be a significant hurdle for many. That’s where car loans come in, providing a financial solution to help you manage the purchase more comfortably.

However, taking on a car loan is a significant financial decision, so it's crucial to weigh up the pros and cons carefully before committing. You find out whether taking out a car loan is worth it for you, as well as what your car finance options may be and the things to consider before you apply, with Savvy today!

The pros of taking out a car loan

  • Purchase a car with less or no money down

The most obvious benefit of a car loan is that it enables you to purchase the car without having to pay as much upfront. While you can still contribute a sizeable deposit if you wish to, financing for 100% of the vehicle’s price is common practice.

Many people don’t have the necessary savings to pay for a car in full or would prefer to use their savings for a home deposit, other investments or simply keep them as a safety net. A car loan allows you to space out your repayments, rather than taking a big hit to your finances.

  • Help in building up your credit

A car loan can also help you build and improve your credit score and history. Provided you make your repayments on time and in full, you’ll see your score increase. Establishing a strong credit history will benefit you with future financing requirements, such as potentially unlocking better car loan rates or boosting your chances of home loan approval down the track.

  • Access to cars outside your previous price range

If you’re sticking to your savings, you’re limited to cars that sit within a price range that’s comfortable for you. However, with a car loan, this becomes more manageable.

For example, rather than take a $50,000 hit to your hard-earned savings to buy your dream car, making a $10,000 deposit towards a five-year car loan at 7.50% p.a. would only set you back just under $370 per fortnight.

  • Lower rates than unsecured loans

Secured car loans come with lower rates than unsecured finance. This is because secured finance uses the car you purchased as collateral for the loan. As a result, they’re deemed a lesser risk by lenders than unsecured loans, where they don’t have anything to fall back on if the borrower defaults on the loan.

  • Potential tax benefits

If you’re purchasing the car for business use, the interest payable can be claimed as a tax deduction, alongside the GST on the purchase and depreciation of the vehicle. The portion of the costs you can claim depends on how much it’s used for business purposes compared to private usage.

The cons of taking out a car loan

  • Interest and fees

As part of your finance agreement, you’ll have to pay interest and fees on top of your loan instalments. The cost of these will depend on what your lender sets their rate and fees at, as well as the size of your loan and length of your term. You can see how each of these impacts the cost of your loan in the following example:

  • Interest rate: on a $30,000, five-year loan repaid monthly, an increase in rate from 7.50% p.a. to 9.00% p.a. would result in you paying just under $1,300 extra in interest overall.
  • Loan amount: by increasing the loan sum from $30,000 to $40,000 on a five-year loan repaid monthly at 7.50% p.a., you’d pay more than $2,000 extra in interest.
  • Term length: increasing your term on a $30,000 loan at 7.50% p.a. (repaid monthly) from five to seven years would result in almost $2,500 in extra interest. Alternatively, shortening it to three years would have almost the exact opposite effect.

  • The bank effectively owns your car until your last payment

As the car is secured by your loan, it could be at risk of being repossessed by your lender if you fail to make repayments and default on your loan. There are measures that can be taken with a lender in situations such as these, like hardship measures and repayment plans, and repossession is a last resort.

It isn’t entirely uncommon to be behind on your car loan repayments, with Equifax’s Quarterly Consumer Credit Report from Q4 (October to December) 2023 revealing that approximately 3.5% of all car loans in Australia were in arrears.

  • Depreciation

The value of your car decreases throughout the loan term. The rate of depreciation may depend on the type of car it is. In some cases, the amount you still owe is higher than the market value of the car, which is known as negative equity.

This can become a problem if you want to sell your car during your term, as you’ll need to cover any gap between what’s owed to the finance company and how much you receive from the sale. If you don’t have any plans to upgrade mid-term, however, this won’t apply.

The car loan and finance options available to you in Australia

Secured car loans

As mentioned, the loan is secured by the car, resulting in the interest rate typically being lower as a less risky proposition to lenders. Secured car loans commonly come with fixed interest rates, meaning they remain the same throughout your entire loan term.

Unsecured car loans

With unsecured car loans, the lenders have no collateral for the money borrowed. This type of loan is considered to be a higher risk for the lender, leading interest rates to be higher on average. However, because of the lack of collateral, they can often be faster to process and approve.

Novated lease

A novated lease is a finance option where your lease payments are deducted from your pre-tax income by your employer, which is known as salary sacrificing, and you’re given the option to purchase the vehicle at the end of the term. The main benefit of this arrangement is that it reduces your taxable income.

Chattel mortgage

Chattel mortgages are a common kind of business car finance. They’re similar to a standard car loan in terms of their structure, but allow you to claim the interest on your loan, GST on the vehicle purchase and depreciation as tax deductions.

Car lease

A car lease is a rental agreement which allows you to rent a car (or a fleet of cars) for a set period for your business. This allows companies to gain access to the latest cars without having to purchase them outright each time they look to refresh their vehicle stocks.

What to do before applying for your car loan

Compare your options

Comparing car loan options before you apply is essential to help you find the best available deal, according to Bill Tsouvalas, Managing Director of Savvy.

“Many Australians will miss out on the best available car loan deal for their needs simply because they don’t compare their options thoroughly”, he said.

“It’s never been easier to consider a wide range of offers side-by-side to help you determine which is the most suitable for your situation.

“Seeking out pre-approvals from different lenders is one way to effectively compare loans, which can also be done for you if you apply through a car finance broker.”

Bill Tsouvalas, Managing Director - Savvy

The main factors to consider when comparing your loan options include:

  • Interest rates
  • Fees
  • Available loan terms
  • Personal eligibility criteria
  • Vehicle eligibility criteria
  • Whether balloon payments or residual values apply

Understand how much you can afford to repay

It’s important to understand how much you can realistically afford to borrow before you apply. Consider your income and other outgoing expenses to work out a comfortable repayment schedule with the loan you’re looking for. The longer the loan term is, the lower the repayments will be but the more they’ll cost overall.

Look at your credit file

Your credit history will have an impact on the interest rate you receive, the amount you can borrow and your overall chances of approval, so the first thing to do is to tidy up any finance-related issues you can. For example, consider paying off any defaults or credit cards that affect your credit history. Other actions like reducing your credit limits and continuing to repay your debts promptly can also boost your credit profile.

Is financing a car worth it for you?

Ultimately, whether a car loan is worth it for you will depend on your circumstances and what you value. Do you want to keep your savings intact and pay off your car at a slower, more comfortable pace? A car loan might be your preferred choice in this instance.

Car loans have proven to be a popular choice among Australians, with the value of new fixed-term loans for the purchase of road vehicles rising to over $15.5 billion across 2023, according to the December 2023 lending indicators from the Australian Bureau of Statistics (ABS)

However, if you have plenty of cash savings to cover the cost of the car and want to avoid interest and fees building up over time, you’re likely to prefer giving a car loan a miss. Whichever option you end up taking, it’s important to appreciate the benefits and drawbacks of each option before you make your call.

If you decide to apply for a car loan, you can compare a range of options by submitting an easy online application through Savvy today.

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This guide provides general information and does not consider your individual needs, finances or objectives. We do not make any recommendation or suggestion about which product is best for you based on your specific situation and we do not compare all companies in the market, or all products offered by all companies. It’s always important to consider whether professional financial, legal or taxation advice is appropriate for you before choosing or purchasing a financial product.

The content on our website is produced by experts in the field of finance and reviewed as part of our editorial guidelines. We endeavour to keep all information across our site updated with accurate information.

Approval for car loans is always subject to our lender’s terms, conditions and qualification criteria. Lenders will undertake a credit check in line with responsible lending obligations to help determine whether you’re in a position to take on the loan you’re applying for.

The interest rate, comparison rate, fees and monthly repayments will depend on factors specific to your profile, such as your financial situation, as well others, such as the loan’s size and your chosen repayment term. Costs such as broker fees, redraw fees or early repayment fees, and cost savings such as fee waivers, aren’t included in the comparison rate but may influence the cost of the loan. Different terms, fees or other loan amounts may result in a different comparison rate.

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