How Car Finance Works in Australia

The short answer

Most car finance in Australia is a secured car loan. The lender pays for the car, you repay the loan over a fixed term, and the lender holds the car as security until the loan is paid off. Because the car backs the loan, secured car loans are usually cheaper than unsecured personal loans.

The main things you choose are how much you borrow, over how long, whether you put down a deposit or trade-in, and whether you leave a balloon at the end. The lender decides your rate, mostly from your credit history, your income and the car itself.

How a secured car loan works

When you take out a secured car loan, the lender registers its interest in the car on the Personal Property Securities Register (PPSR). That registration is removed once you have paid the loan out.

• You own and drive the car from day one. The lender just has a claim over it while money is owing.
• Repayments are usually fixed, weekly, fortnightly or monthly, over a term of one to seven years.
• The lender will normally want comprehensive insurance on the car for as long as the loan runs.
• If you sell the car before the loan is paid off, the loan is paid out from the sale.

Lenders usually have rules about the car as well as the borrower: some limit how old the car can be at the start or end of the loan, and some will not lend on certain vehicles at all. We cover this in more detail in our guide to new vs used car loans.

Loan term: lower repayments, more interest

A longer term lowers your repayment, but you pay interest for longer. On a $25,000 loan at 10% p.a. with no fees:

• Over 3 years: about $807 a month, and about $4,040 in interest.
• Over 5 years: about $531 a month, and about $6,871 in interest.
• Over 7 years: about $415 a month, and about $9,862 in interest.

These are illustrative figures only, not a quote. The right term is usually the shortest one that keeps the repayment comfortable for your budget, with room left for running costs like fuel, rego, insurance and servicing.

Balloon payments

A balloon is a lump sum left owing at the end of the loan. It lowers your regular repayment, because you are not paying off the whole amount during the term.

On a $40,000 loan over 5 years at 9.5% p.a. with no fees:

• With no balloon: about $840 a month, about $10,404 in interest in total.
• With a 25% balloon ($10,000 owing at the end): about $709 a month, but about $12,553 in interest in total, plus the $10,000 to pay, refinance or cover by selling the car at the end.

A balloon suits some people, but it moves cost to the end of the loan rather than removing it. Before choosing one, think about what the car is likely to be worth when the balloon falls due, and how you would pay it. Not every lender offers a balloon on a personal car loan, and older cars usually qualify for smaller balloons or none.

Fees to look for

The interest rate is only part of the cost. Car loans can also carry:

• An establishment or application fee, charged up front and often added to the loan.
• A monthly account-keeping fee.
• An early payout fee, or break costs, if you repay a fixed-rate loan early.
• Fees for private sales or vehicle inspections with some lenders.
• If you use a broker, a broker or origination fee, which must be disclosed before you go ahead.

This is why car loan advertising has to show a comparison rate as well as the interest rate. Our guide to comparison rates shows how a lower headline rate can still cost more.

What decides your rate

Lenders price each application individually. The main factors are:

• Your credit history: your repayment history, any defaults and how many recent credit applications you have made.
• Your income, how long you have been in your job, and your living expenses and other debts.
• The car: new, demo or used, how old it is, and whether it is bought from a dealer or privately.
• Your deposit or trade-in, which lowers the amount the lender is exposed to.
• Whether you own property, which some lenders treat as a sign of stability.

Under responsible lending laws, a lender has to make reasonable inquiries about your situation and must not give you a loan that is unsuitable, for example one you could only repay with substantial hardship. That is why lenders ask for payslips and bank statements.

Getting finance through Flash Funding

You can compare indicative car loan options on our home page in under a minute, with no credit check. If you want to go ahead, a Flash Funding broker reviews your situation, compares lenders on our panel and handles the application through to settlement.

• Typical documents: your driver licence, two recent payslips (or tax returns if you are self-employed), recent bank statements and the car's details or invoice.
• We start with a soft credit check, which does not affect your credit score. The lender runs a full credit check only when you decide to apply.
• Before you commit, you receive our Credit Guide and a quote showing any fee we charge and the commission the lender pays us.

Compare car loan options or read more about car loans.

Frequently asked questions

Sources

• PPSR: Searching the register
• ASIC: Responsible lending disclosure obligations (INFO 146)

Related reading

Related service: Car loans