Types of car loans
Confused or need guidance on what types of car loans are out there? Read our guide and make and informed choice.
Most of us will need a car loan when buying a new car. There are many options out there – personal loans, secured loans, and variable or fixed rates. In this guide, we’ll take the mystery out of all these terms and tell you in plain English what you can expect from each of these options.
Personal or Unsecured Loans and Secured Loans
In personal finance and buying an asset such as a car, you may be given the option of unsecured or secured finance. Choosing one or the other may impact how much you can borrow and what your final interest rate will be.
Secured car loans
A secured car loan ties the value of the loan to the car, known as a security. This security, also known as an asset, when held against the value of the loan, reduces the risk on the part of the lender when they approve a car loan. The lower risk means a lower interest rate for the borrower, compared to a personal or unsecured loan of the same term and amount. Lenders will also only lend you the amount necessary to cover the cost of the car, up to your borrowing limit. This is determined by your credit score and income.
Personal loans are a type of unsecured loan that are not tied to a car or asset (security.) That means you can apply for a personal loan and spend the money as you like – but you will still have to pay back the loan as agreed. Unsecured personal loans mean that a bank or lender cannot repossess your car if you fall behind on payments and default. In exchange for this, your interest rates will be higher than a comparable secured loan. These are far less common, as a car is a ready option as a security.
Can you get car loans for used cars?
Yes – you can get a car loan to finance the purchase of a used vehicle. However, some lenders may charge more interest due to higher risks. Buying new has more advantages for the lender and the borrower as the borrower has more residual value in the car to begin with. Some used car loans may have low rates and low fees and more flexible payment terms. This depends on the borrower’s individual situation.
Alternative loan options
Bank and non-bank lending (traditional) loans make up most of the finance available when buying cars. However, there are some alternatives out there that you may want to consider.
Other options for people looking to finance a car are Peer-To-Peer finance (P2P.) P2P finance links borrowers with private lenders directly. According to the Australian Securities and Investments Commission, $300 million has been financed by P2P lending over Financial Year 2018-19, which also includes personal lending and mortgages. These come in a variety of options such as unsecured and secured loans, fixed vs. variable rates, and other features depending on a borrower’s risk profile, income, demographic, geography, and other factors.
A novated lease is also known as “salary sacrificing.” This is a three-way agreement between a lender, an employer, and employee. An employee will set aside some of their pay packet to finance the car, which may have the added benefit of bumping the employee’s salary into a lower tax bracket.
If you are a homeowner with an active mortgage, you can use a line of credit or redraw facility to finance a car. Despite a smaller interest rate compared with a consumer car loan, you could be paying more in interest due to the long-term nature of a home loan.
Car dealer finance
Car dealer finance is also an option, though this may cost you more compared with a consumer car loan due to how these loans and packages are structured. Read more about car dealer finance here.