Buying a car is exciting, and it’s easy to get caught up in colours, features and test drives. Sorting out your finance first takes a lot of pressure off. You’ll know your budget, you can focus on the car itself, and you can make a decision in your own time.
This guide is about consumer car loans, where the car is mainly for personal use. If the vehicle is mainly for your business, asset finance such as a chattel mortgage is usually a better fit.
What car loan pre-approval means
Pre-approval (sometimes called approval in principle) is a lender’s conditional indication of how much it’s prepared to lend you, based on your income, expenses, debts and credit history.
It isn’t a final approval. Once you’ve chosen a car, the lender will usually want details of the vehicle, such as its make, model, year and price, and may re-check your finances before it settles the loan.
Pre-approval helps in a few ways:
- A clear budget. You can shop for cars you can comfortably afford, including on-road costs, insurance and running costs.
- Less pressure. As Moneysmart notes, knowing what you can spend before you visit a dealership can help you resist sales pressure.
- Quicker settlement. Once you’ve found the right car, much of the paperwork is already done.
Secured vs unsecured car loans
Secured car loan. The car you’re buying is used as security. If repayments aren’t made, the lender can repossess and sell it. Because the lender has security, secured loans are often priced lower than unsecured loans. Lenders usually set rules about the age and type of car they’ll accept as security.
Unsecured loan. This is a personal loan with no asset as security. It can be used for older cars or private sales that a secured lender won’t accept. Moneysmart notes that unsecured loans usually have higher interest rates than secured ones.
Dealer finance vs using a broker
Many dealerships offer finance on the spot, and that convenience suits plenty of buyers. Moneysmart’s general guidance is simply to compare it with other options before you sign.
A broker works a little differently. Rather than offering finance alongside one particular car sale, a broker can compare loans from a panel of lenders and arrange pre-approval before you start shopping. That means you can walk in knowing your numbers, and you’re free to buy from a dealer or a private seller.
Whichever way you go, it’s worth asking the same questions: what’s the comparison rate, what fees apply, is there a balloon, and are there any optional add-ons? If you’re offered extras such as loan protection or gap cover, take your time to read what they cover and decide whether you need them.
A note from Jenny I’d always rather you walk into a dealership with your finance already in your pocket. It means the only thing left to negotiate is the car, and you can take your time without feeling rushed into a decision on the day.
Balloon payments
A balloon payment is a lump sum due at the end of the loan. Including one lowers your regular repayments, but you’ll still owe that amount at the end, and you pay interest on it for the whole term.
Illustrative example only: on a $40,000 car loan with a $10,000 balloon, your regular repayments are worked out on repaying $30,000 over the term. At the end, $10,000 is still owing. You’d then need to pay it, refinance it or sell or trade in the car to cover it.
Before choosing a balloon, think about what the car might be worth when the balloon falls due and how you’ll pay it. If you’d rather own the car outright at the end, a loan without a balloon may suit you better.
Buying from a private seller
Private sales can be good value, but they need a little more care.
- Check the PPSR. The Personal Property Securities Register lets you search a car’s VIN or chassis number online for a small fee. The search shows whether money is recorded as owing on the car, and may also show whether it’s recorded as stolen or written off. If there’s money owing and you buy it anyway, the car could be repossessed even though you’ve paid for it.
- Search close to the day. The PPSR suggests searching on the day of purchase or the day before.
- Have the car inspected. A PPSR search doesn’t tell you about the car’s condition, odometer reading or service history.
- Check your lender’s rules. Some lenders treat private sales differently, for example needing a PPSR certificate, a vehicle inspection or a payment made directly to the seller or their financier.
You can search at ppsr.gov.au.
Understanding the comparison rate
When you look at car loans, you’ll usually see two rates: the interest rate and the comparison rate.
The comparison rate combines the interest rate with most fees and charges into one percentage. It gives you a more complete picture of the cost of a loan than the interest rate alone. Two things to keep in mind:
- Compare like with like. Make sure you’re comparing loans with the same loan amount and term.
- It’s a guide. A comparison rate is based on an example loan, so your actual costs can differ. Fees for things like paying off the loan early may not be included.
Getting started
Before you apply, gather your ID, recent payslips (or tax returns if you’re self-employed), bank statements and details of any existing debts. A quick conversation about your budget, the kind of car you’re looking for and whether you’re buying from a dealer or privately helps narrow down which lenders are a good fit.
The information in this guide is general in nature and doesn’t take your circumstances into account. All loans are subject to lender criteria, terms and conditions.
This information is general in nature and does not take into account your objectives, financial situation or needs. Lending criteria, terms, fees and charges apply and vary between lenders. Speak with us for advice about your circumstances.