What Are The Different Types Of Car Loans?

Find out about what variations there are in financing your next car with Savvy.

No obligation. It won't affect your credit score.
Written by 
Savvy Editorial Team
Savvy's content writing team are professionals with a wide and diverse range of industry experience and topic knowledge. We write across a broad spectrum of finance-related topics to provide our readers with informative resources to help them learn more about a certain area or enable them to decide on which product is best for their needs with careful comparison. Meet the team behind the operation here. Visit our authors page to meet Savvy's expert writing team, committed to delivering informative and engaging content to help you make informed financial decisions.
Our authors
, updated on July 5th, 2023       

Fact checked

At Savvy, we are committed to providing accurate information. Our content undergoes a rigorous process of fact-checking before it is published. Learn more about our editorial policy.

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

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

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.

Novated leasing

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. 

Mortgage redraw

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.

Tips on how to get the best car loan

Questions about different car loans answered

Which type of loan is better? Secured or unsecured?

That’s up to your preferences and circumstances. Secured loans are more competitive than unsecured loans, but your car is on the hook if you can’t pay off the loan. Unsecured loans have more flexibility but are more expensive.

Is a comparison rate a different type of loan?

No. A comparison rate is a different way of calculating the total cost of a loan. Instead of using a base interest rate and adding fees after the fact, a comparison rate includes most fees and charges as part of the rate.

I’m looking at a car for my business. What are my options for car finance?

The most popular options for financing cars for business is a chattel mortgage or hire purchase. These are almost identical in operation but differ on “on-the-books” ownership, whether the business takes ownership straight away or at the end of the loan term. The car or vehicle must be for over 50% business use to qualify.

What car loan is best for paying off faster?

A variable car loan is best if you wish to make extra repayments or lump sum deposits, as you are usually not penalised like in fixed rate loans.

How do I figure out my repayments?

The easiest way is to use a car loan calculator. You’ll need to know your budget, your interest rate, and your loan term to make accurate (yet still approximate) calculations. Use Savvy’s calculator here.

Your helpful guides to types of car loans

What is a balloon payment?

You may have come across the term “balloon payment” when searching for your car loan. It is most popular or often used by sole traders or small businesses. Balloon payments are also known as residual value payments. This is a portion of the car loan amount set aside for immediate payment at the end of the term. This varies from 20-50%. The upside of having a balloon payment attached to your loan is that your regular repayments are lower, but you will need to come up with the lump sum quickly (up to a month or two) to close out the loan. You can also refinance the lump sum, but this may attract more interest.

Fixed rate car loans

The rates in fixed vs variable rates refer to how the interest rate is calculated from one repayment period to the next. Fixed rate car loans are loans with interest rates that are consistent across the term of the loan. This means you “lock in” a rate from the beginning to the end of the loan. Variable loans can go up or down depending on the market rates. Variable rate car loans are harder to budget for; each month or repayment period you amount payable could be different. If you buy a car while the market is high and goes low, you could end up paying less. Of course, this is hard to predict and makes budgeting harder.

How to choose the right loan term?

In car finance, the most common loan term is five years or 60 months. With most lenders, you can choose your loan term to suit your needs. Shorter loan terms attract less interest but have substantially larger repayments. Longer terms mean more interest and lower monthly repayments – as you are making more repayments. For example, a $30,000 loan at 5.75% with a three-year term will mean $909 in monthly repayments. The same amount and interest rate over seven years will mean $435 in repayments. However, you will pay $3,779 more in interest with a longer term.

Getting a car loan with a guarantor

If you have been rejected for car finance or suspect you may be rejected, you can still get a car loan by using a guarantor. A guarantor is a family member or trusted friend with good credit who offers to take responsibility for the loan if you are unable to pay it back. You “piggyback” their good credit score and gain approval with a bigger budget and/or lower interest rate than what you’d be normally entitled to. However, any missed payments or defaults will also effect your guarantor’s credit history, so make sure you are aware of all the consequences.

Helpful guides on car loans

What is road rage costing you?

Could road rage lead to an early grave? According to a joint study on road rage conducted by insurer RACQ and the University of the Sunshine Coast, aggressive drivers had...

Cars with the best retained value

1. If you have the taste for the finer things Purchasing a luxury brand car is one option you can consider when looking for a car that retains its value....

Kia Finance Options

How do I get car finance? Qualifying for car finance isn’t tricky. You’ll need to be at least eighteen years of age and a resident or citizen of Australia. Lenders...

Do I need all-wheel drive in my SUV?

What is an all-wheel drive vehicle? If you own an SUV or looking to own one you might have come across the term AWD or all-wheel drive vehicle. What this...

First Car Loan

First Car Loans Compare car loan options for your first car Buying your first car is a major milestone in anyone’s life; most of us will have to do it...

What Is a Bad Credit Car Loan?

Bad credit is when your credit file shows that you have not managed loans or other accounts well. It could be that you missed a couple of payments on your...