Car loans – is it better to buy a car on finance or not? Here is the rundown on what options are available to get your next new car.
Car finance is the daunting and somewhat deflating task that often must be done when buying a car (unless you are purchasing outright). Thankfully, it’s a fairly straightforward process depending on what type of finance you want. This can be a personal loan, secured car loan, special car dealer loan, or even a novated lease. We cover all of these options below and explain what things like balloon payments and car leasing actually means. Plus why you might choose one over the other.
Any advice on this page is general. We have not taken into account your financial situation or needs so consider whether this general financial advice is right for your personal circumstances. To seek advice for your own particular circumstances we advise seeing a financial advisor and checking the latest interest rates and product information.
Personal or bank car loans
A personal loan is a popular way to finance a new car. Borrowing money from a bank or other financial lender gives you instant ownership of a car.
You usually don’t need a deposit (unlike most car manufacturer loans) and there are usually no restrictions on how you use your vehicle such as how far you’ll travel and what it will be used for.
The annual percentage rate (APR) is the easiest way to compare loans, and it’s essential information if you want to work out how much a loan will cost you over its lifetime. If the APR isn’t clearly shown (it should be), then ask for it. The headline rate isn’t necessarily what you’ll get, though, as it can vary, depending on your credit rating. We cover the current car loan interest rates in more detail below.
Car manufacturer finance loans
There are loans through new car dealers and they can be headlined by offers such as being interest free. For these loans, check out the details on what’s being offered in the manufacturer deal. These might include interest-free offers, low APR rates, or manufacturer deposit contributions.
However, don’t fall for the low (or zero) interest rate or monthly repayments. Have a look at the total amount you’ll have to pay back to understand exactly how much dealer finance will cost you, and compare the long-term costs with any deals you can find elsewhere.
These loans might require a certain credit rating or hefty deposit too, so make sure to read the conditions and understand the fine print.
Additional fees
There may also be additional fees involved in a car loan, including monthly account-keeping fees, for example, so always make sure you know what all the costs are, and what you’ll be paying in total.
Can you get out of the loan early by paying any outstanding amount off? Some loan companies make this difficult, and not just dodgy lenders – mainstream lenders can too, so always read the small print and ask those important questions before signing on the dotted line.
What’s a balloon payment? (And is it a good idea.)
Balloon payments can be applied to almost any car loan but are often included in finance offers for expensive vehicles. Essentially, the balloon payment will make the monthly finance cost seem attractive for the overall cost of the car but it leaves a problem to fix at the end of it. However, it’s not a problem if you are well aware of it and have a plan for how you wish to proceed once the finance contract comes to a close.
The balloon payment is a payment that must be met at the end of the finance term (usually two to five years) and it is the amount that you did not finance for and have not paid down in monthly installments.
This means that at the end of the term, your car is worth an agreed amount (the balloon payment). You can pay that amount – the balloon – and keep the car, or give the car back and use that balloon amount as a down payment on another car (trade-in), and continue on. However, this kind of arrangement is where a novated lease might make more sense.
Novated lease
A novated lease is a form of car leasing an employee can use if their employer agrees to it. And there are many benefits to car leasing despite it not being a direct method of buying a car.
A novated lease is organised over a set term (usually 2-5 years) and has set monthly payments. These payments usually include everything from the cost to finance the car (which is owned by the leasing company) to registration and insurance fees.
Beyond convenience, the benefit for some will be that all costs come from the employee’s salary before tax and this can bring some very valuable tax savings by lowering income tax (significantly in some instances).
Depending on your salary, if you pick the right price point for your new car, you can end up losing very little in take-home pay and have a new car.
As leasing companies are usually very large they have great buying power and can negotiate better deals than anyone walking into a dealership.
Car loan interest rates
As of March 8 2023, the Reserve Bank of Australia (RBA) has set the Cash Rate Target (CRT) at 3.60%. This is currently a changing scenario where interest rates may go higher.
When shopping for car finance you won’t find a car loan set at the CRT. This is because bank and other lender finance rates are higher to include costs and charges although there can still be account-keeping and other fees on top of this.
Car finance comparison websites will show you which moneylenders (listed on their site) offer the best deals. Currently, competitive rates are starting at under 6% according to Canstar. However, there are other comparison sites (such as iSelect) that we encourage you to research and look at to make sure you are getting the best idea of what is available now.