Having a vehicle is an essential part of life for millions of Australians. Whether you’re a first-time driver looking for a used vehicle, a tardier searching for a work vehicle, or a growing household looking to upgrade, purchasing a vehicle is a significant financial commitment. But not everyone has the cash up front to pay for their ideal vehicle.
A vehicle loan is a specific type of personal loan that you can use to buy a new or used vehicle when your savings won’t cover the total cost upfront. When you take out a vehicle loan, you will need to make regular repayments over a fixed term towards the lump sum you borrowed (the principal), as well as interest accrued. The interest rate will apply on the loan amount from the time you take out the loan.
Shopping around for the best vehicle loan can save you thousands in interest and fees.
A vehicle loan is a personal loan for a new or used vehicle. You have to repay the loan and interest over a fixed term, usually between one and seven years.
Types of vehicle loans are available:
Secured & Unsecured Vehicle Loans
Most vehicle loans are secured. Your vehicle will typically be the security for the loan. If you don’t pay the loan back on time, the lender can repossess your vehicle and sell it. With an unsecured loan, you don’t have to provide your vehicle as security. But the interest rate will be higher and you won’t be able to borrow as much. Unsecured loans are mainly for used vehicles.
Fixed or variable interest rate
With a fixed interest rate, the interest rate and your vehicle loan repayments are fixed and won’t change. You’ll know exactly how much will come out of your bank account for repayments each month. Vehicle dealerships usually offer fixed rate loans. With a variable interest rate, your vehicle loan repayments can change if interest rates change. If interest rates rise, your repayments will be higher. If interest rates fall, your repayments will go down.
Balloon payment
Vehicle loan repayments are divided up so that they begin smaller, with the borrower paying a larger portion of the loan (say 25%) at the end.
Chattel Mortgage
A specialist vehicle finance option for business use
Operating Lease
More like a long-term vehicle rental arrangement, involving a company leasing a vehicle for an extended period
Commercial Hire Purchase
Closer to a rent-to-buy arrangement, generally involving a finance company buying a vehicle on your behalf and letting you use it in return for regular rental payments. After several payments, you may own the vehicle
Vehicle Lease
Like a commercial hire purchase, but with more options. You rent the vehicle for a set period and at the end of the lease, you either return the vehicle or buy it
Novated Lease
Like a vehicle lease, but with a more complicated ownership structure, as you acquire the vehicle from a second party (usually an employer) which in turn leases it from a third party (a finance company)
New Vehicle Loans
For buying a vehicle that’s under a certain age (often less than two years old)
Used Vehicle Loans
For buying a vehicle that’s over a certain age (often more than two years old)
Green Vehicle Loans
For buying an electric, hybrid, or fuel-efficient vehicle
Compare vehicle loans
Compare loans before you meet the seller. Find out what you can spend and how much your repayments will be.
Compare these features:
| Comparison rate | · a single figure for the cost of the loan that includes the interest rate and fees
· make sure you’re comparing the same loan amount and term when you look at comparison rates |
| Interest rate | · the rate of interest you’ll pay on the amount borrowed |
| Application fee | · the fee when you apply for a loan |
| Other fees | · the monthly service fee
· the default fee or missed payment fee · any other fees — read the terms and conditions to find these |
| Extra repayments | · whether you can make extra repayments without paying a fee |
| Loan term | · shorter terms often have lower interest rates
· longer terms usually mean lower repayments, but you’ll end up paying more interest |
| Loan conditions | · whether the loan can be for a second-hand vehicle or only for a new vehicle
· whether there are limits on how old the vehicle can be |
Cover your other vehicle costs
When calculating how much you can afford to borrow, it could be a good idea to factor in the other costs involved with buying and owning a vehicle to ensure you are budgeting correctly.
Keep in mind that even if you’ve previously owned a vehicle, every vehicle typically has different running and maintenance costs. These can include:
- Stamp duty
- Registration
- Vehicle insurance
- Petrol costs
- Regular services, maintenance, and repairs
- Road tolls
Some lenders offer loans that cover some of these costs as well as the vehicle. It’s better to pay for these other costs up-front if you can — your loan will be smaller and you’ll save on interest.
The requirements to get a vehicle loan
While each lender may have its own eligibility criteria, they generally all have the same requirements:
- Proof of age, identity and residence
- Proof of income and expenses
- Details of assets and liabilities
- Proof of savings
- Good to excellent credit score
- Information about the vehicle and insurance