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Used car finance basics
The handful of ideas that explain most of how a used car loan works.
Secured or unsecured?
A secured car loan uses the vehicle as security, which means the lender can take the car if repayments stop. Because that reduces the lender's risk, secured loans often carry lower rates than unsecured personal loans. An unsecured loan has no security over the car, which can mean more flexibility on what you buy, but pricing and terms differ. Neither is automatically better for you.
Why a car's age matters to lenders
Older cars lose value and can cost more to keep running, so many lenders set limits on the age of the vehicle at the end of the loan term. That can mean a shorter term for an older car, or a different type of loan. Ask the lender how age is treated before you fall for a particular vehicle.
Term, repayment and total cost
A longer term lowers the repayment but usually increases the interest paid overall. A shorter term does the opposite. The right balance depends on your budget and how long you plan to keep the car. See the illustration on the home page, and try a calculator on ASIC MoneySmart.
Fees and the comparison rate
The interest rate is only part of the cost. Establishment fees, monthly account fees and early-repayment charges all add up. A comparison rate rolls most of these into a single figure to help you compare, but it is based on a set example, so your own cost can differ.
Questions worth asking any lender
- What is the total amount I will repay over the full term?
- Which fees apply upfront and ongoing?
- Can I make extra repayments, and is there a cost to pay it out early?
- How does the car's age or kilometres affect the loan?
- Is the rate fixed or variable?
Where to start
If you would like to compare finance options for a car you are considering, you can start a free enquiry here. Approval is subject to lender criteria and there is no obligation. For independent guidance, read ASIC's MoneySmart material on car loans.