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What Is A Car Loan? Types of car loans In Australia

Car Loan in Australia

“I am saving for last two years but still short of money to buy a car. Am I ever supposed to get it?”

We often heard this statement from people who strives hard to save money to buy their first car and ended up buying nothing.  We don’t want you to be listed in the category of those people that’s why we are here to guide you on “Car Loans” with the best of our ability.

Majority of the people in Australia are afraid to get car loans because they are unaware of its basic concept like what is a car loan? What are the basic building blocks of car loan? How many types of car loans are available in Australia? What documents are required for car loan application? Unlike them, after reading this article, you would be able to make sound financial decision regarding car loan and end your quest of figuring out the other ways to obtain your hands on a set of wheels.

Car Loans

If you need a car and don’t have enough funds at your disposal then your call is for “Car Loans”. Car loan is specifically a type of personal loan where you borrow loan from a third party. This third party is called the lender who lends you (borrower) a specific amount to purchase a vehicle of your need. In return, you agree to pay back the lender the amount you owe along with the interest rates, if any, usually in monthly payments.

Unlike personal loans, car loan is a secured loan that means if you fail to pay back the money you owed, the vehicle will be repossessed by the lender and sold to pay off the loan debt. Thus, your bought car itself is collateral in case you get defaults on the loan payments.

For everyone’s convenience, car loan is categorized into two categories i.e., new car loan and used car loan depending upon the type of car a person wants to purchase. For example, if you are looking for a new car then new car loan would be best to fund the purchase of your first-hand car but if you wish to acquire a used car then you have to choose a used car loan option for yourself.  The difference between the two loans lies in the interest rates.  Interest rates on used car loan are a bit higher than for new car loans as old model cars have lower resale value.

Building Blocks of Car Loan

It is important to get the know-how of some of the terms associated with car loans. These are also referred to as the building blocks of car loan as financier often make your contract on the basis of these terms.

  1. Loan Cost- Car loan has two basic types of cost i.e., the principal and the interest.  The principal is the negotiated cost of the vehicle itself whereas interest is the total amount of the costs accrued over the life of the loan based on the principal amount and the stated interest rate.


  1. Interest Rate- When you borrow money from the lender, he or she charges you with an amount of interest due per period, as the proportion of the amount borrowed.  Interest rate is often defined in terms of percentage and getting the best interest rates possible on a car save you thousands.
  2. Down payment- The upfront amount you pay at the time of the purchase of the vehicle is called a down payment.  It is often expressed in terms of percentage of the total amount of vehicle and is always required by the lender.
  3. Terms and Conditions- Whenever you opt for a car loan, lender provides you a document named as terms and conditions. The document includes the term of the loan (normally stated in a number of months or years); insurance and registration requirements; loan payoff and resale terms; maintenance requirements; conditions regarding theft or accident; and conditions of loan default and repossession. As a borrower, you are advised to read the terms and conditions carefully and have a clear understanding of what they mean before signing on.

Types of Car Loans in Australia

Having a good understanding of car loans is not sufficed to sign your first contract. There is a lot more of it that needs to be rightly explored like either a particular loan is suitable for your present financial standing or the monthly payments are affordable for you or not. These queries can only be resolved when once you have the information of different types of car loans available in the market. Here you go!

1.Standard loan

This type of loan can be borrowed from the financial institutions like banks and credit unions. The financier provides you a handsome amount of money for purchasing of either first-hand or secondhand car of your choice. Standard loan has higher interest rates than the others but it is worthy if you have great financial standing and can pay off the payments on time.

2.Finance Lease

If you don’t qualify for a standard loan then finance lease is a good choice for you. Finance lease companies offer two to three years old car with a lease of three to four years. Meanwhile, you pay a standard monthly fee for the car. Finance lease either give you the option of upgrading your car or purchasing from the dealer by the end of the term.

  1. Novated Lease

Novated lease is a three way agreement between employer, employee and the vehicle provider in which an organization offers car to their employees as a part of their benefits and in return, take a portion out of their salary for compensation.  Although it seems a fair deal but an employee has to take care of all the operating costs including rego, car insurance and car maintenance.

  1. Commercial Hire Purchase

It is a commercial finance product where a lender purchases a vehicle on your behalf and then you hire that vehicle from lender for a monthly fixed payment. According to the terms of the contract between you and lender, you have the full use of the vehicle but you won’t become an owner until or unless you pay the full price of the vehicle in addition to interest charges.

  1. Operating Lease

A financier purchases a car and rent it out to the user. Unlike finance lease, operating lease does not convey the ownership rights of the asset.  The lease payment you do would be treated like the operating expenses and count as off-balance sheet financing.

  1. Chattel mortgage

A chattel mortgage is a type of loan arrangement where a financier advances money and your car acts as a security for a loan. The vehicle, or chattel, guarantees the loan, and the lender holds an interest in it.

Documents Required for Car Loan Application

To apply for the car loan you have to go through a procedure that is necessary for a lender to lend you a loan. It is not a time taking process as with the technological advancement, the majority of the paperwork has been shifted to an online system.  All you have to do is to put together a checklist of the documentation you will need to support your car loan application.

The lender initially checks your identification, personal details, bank statements, credit history record and proof of income. Your identification is necessary as it helps the lender to know who you are. You can prove your identity by providing your driver’s license, passport or birth certificate. During the application process, your contact details are required so that lender can contact you in future regarding your car loan approval or disapproval.  Your past credit history records i.e. rental payment, electricity payment etc., is evident for a lender that whether you would be able to make the loan payments. Besides that if you have already taken some other kinds of loan, and then a lender would also like to see the bank statements of that to check you are not a defaulter. You are also required to attach the pay slips of the past few months as a proof for your income source.

So, are you ready to purchase your dream car despite not having enough money at the moment?


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