Ready to get behind the wheel of a new car but not sure how to finance it? You’re not alone. Understanding how car loans work is the first step toward making a smart financial decision.

This guide will walk you through everything you need to know, from the different types of loans available to how you can secure the best interest rate, and potential alternatives so you can make the best decision for your financial situation.

So, How Does a Car Loan Work?

A car loan is a straightforward financial product. You borrow a specific amount of money from a lender (like a bank or credit union) to purchase a vehicle. In return, you agree to pay back the borrowed amount, plus interest and any fees, over a set period.

Here’s the process broken down:

• You apply for a car loan and the lender assesses your financial situation.
• If approved, you receive a loan offer detailing the amount, interest rate, and repayment term.
• The lender typically pays the car seller or dealership directly.
• You make regular repayments (usually monthly) over the agreed-upon loan term.
• Once you’ve made the final repayment, the car is officially all yours.

The loan term, which is the time you have to repay the loan, usually ranges from one to seven years.

Australians commonly choose 5-year loan terms.

Types of Car Loans in Australia

When you start looking for a car loan, you’ll encounter a few different types. The main options are secured and unsecured loans, which can come with either a fixed or variable interest rate.

Secured vs. Unsecured Loans

Secured Car Loan: This is the most common type of car loan. The car you’re buying is used as ‘collateral’ or security for the loan. This reduces the risk for the lender, which often means you get a lower interest rate. If you fail to make your repayments, the lender has the right to repossess the vehicle to recover their costs.

Unsecured Car Loan: With this loan, you don’t need to offer any collateral. Instead, the lender relies on your credit score and financial history to approve the loan. Because there’s more risk for the lender, unsecured loans usually come with higher interest rates.

Fixed vs. Variable Interest Rates

Fixed Rate Loan: The interest rate is locked in for the entire loan term. This means your repayment amount will never change, making it easier to budget. You’ll have certainty and protection from any market rate rises.

Variable Rate Loan: The interest rate can change throughout the loan term, usually in response to shifts in the wider economy. Your repayments could go up or down. While there’s less certainty, you could benefit if interest rates fall.

Key Features to Understand

Before signing on the dotted line, it’s important to understand the key terms and features associated with car loans.

Loan Term: The length of time you have to repay the loan. A shorter term means higher monthly repayments, but less interest paid overall. A longer term will lower your monthly repayments, but you’ll pay more interest over the life of the loan.

Interest Rate: The percentage the lender charges you for borrowing the money. As of late 2024, most secured car loans in Australia sit between 6% and 12% p.a., but this can vary depending on your credit profile.

Comparison Rate: This rate gives you a more accurate picture of the loan’s total cost. It includes the interest rate plus most fees and charges, making it a valuable tool for comparing different loan offers.

Fees: Look out for establishment fees (a one-off charge for setting up the loan), ongoing monthly account-keeping fees, and early repayment penalties if you want to pay off your loan ahead of schedule.

Balloon Payment: Some loans offer lower monthly repayments in exchange for a large, one-off lump sum payment at the end of the loan term. This can make repayments more manageable, but you need to be sure you can afford the final balloon payment.

Redraw Facility: This feature allows you to make extra repayments on your loan and then ‘redraw’ or access those extra funds if you need them later. It offers flexibility but isn’t available with all loans.

Where to get car finance

There are several ways to get car finance apart from banks and traditional financial institutions. We’ve compiled a guide to all the options you can take, though some methods are better than others for your particular situation.

Type of Car Loan Option	Description	Pros	Cons
Loans through financial institutions (banks, credit unions, building societies)	Offered as standalone car loans or personal loans through banks and other financial institutions. Applications can usually be made online, over the phone, or in person.	✅ Potential to negotiate loan amount or term ✅ Convenient if you already bank with the lender ✅ Well-established institutions with clear terms	⚠️ Loyalty doesn’t guarantee best interest rate ⚠️ May have stricter lending criteria
Redraw facility / Line of credit	If you have a home loan, you may be able to access funds through a redraw facility or a line of credit to buy a car.	✅ Home loan rates are often lower than car loan rates ✅ Combines repayments for easier budgeting	⚠️ Longer loan term can increase total interest paid ⚠️ May cost more over time compared to a standard car loan
Peer-to-peer (P2P) personal loans	Borrow money directly from private investors via an online P2P lending platform, rather than a traditional lender.	✅ Competitive interest rates ✅ Fully online application process ✅ May suit borrowers seeking flexibility	⚠️ May include upfront and ongoing fees ⚠️ Usually shorter loan terms and lower loan amounts
Car dealer finance	Some car dealerships offer in-house finance through partnered lenders, allowing you to buy and finance the car at the same time.	✅ Convenient, one-stop process ✅ Dealer handles most of the paperwork	⚠️ May not be the best rate available ⚠️ Car price could be marked up ⚠️ Must check contract carefully for fees ⚠️ Flex commissions banned since 2018 by ASIC

Things to Consider Before Applying

Getting a car loan is a big commitment. Before you apply, take some time to think about your budget and what you can realistically afford.

Your Budget: How much can you comfortably afford to repay each month without stretching your finances too thin? Remember to factor in other car-related costs like insurance, registration, and fuel.

Your Deposit: Having a deposit can be a big help. Putting down 10% or more of the car’s value can lead to lower repayments and reduce the total interest you pay.

Your Credit Score: Your credit history plays a major role in whether your loan is approved and what interest rate you’re offered. Paying bills on time and reducing existing debts can help improve your score.

The Car’s Age: If you’re buying a used car, be aware that some lenders have restrictions on the age of the vehicle they will finance. Older cars may actually end up more expensive to finance relative to new cars.

How to Apply and Get the Best Rate

The application process is more streamlined than ever, with many lenders offering online approvals within 24–48 hours. Here’s how to put your best foot forward.

1. Gather Your Documents:

You will typically need:

• Photo identification (like a driver’s licence or passport)
• Proof of income (payslips or bank statements)
• Details of your assets, debts, and living expenses
• Information about the car you want to buy

2. Compare Your Options:

Don’t just accept the first offer you receive. LoanCalculator.com.au compares rates and features from over 40 reputable Australian lenders. We don’t favour any particular lender—results are displayed based on your loan preferences, not commissions. Once you enter a few quick details, you’ll instantly see side-by-side comparisons of matching lenders, helping you find the best rates and terms within minutes.

3. Check Your Credit Score:

A healthy credit score can unlock lower interest rates. You can get a free copy of your credit report from agencies like Equifax, Experian, or illion every three months, or if you have been recently rejected from a loan or credit application.

4. Consider a Pre-Approval:

Getting pre-approved for a loan gives you a clear budget to work with when you go car shopping. It shows sellers you’re a serious buyer and gives you greater negotiating power.

How Car Loan Pre-Approval Works

Pre-approval for a car loan is a valuable step in the financing process that helps you understand the amount you can borrow before choosing a vehicle. Lenders evaluate your financial profile, including your income, expenses, and credit score, to determine your borrowing capacity and the interest rates you qualify for when you apply for pre-approval. This is not a commitment to a specific loan but rather a conditional loan offer that enables you to clarify your budget. So, pre-approval in place can simplify your negotiation at the dealership, you already have an established loan range, which will save you time and can also mean better terms.

What if I have bad credit?

Having bad credit doesn’t mean your financial goals are out of reach, it just requires a more strategic approach. Lenders may view lower credit scores as a higher risk, which can result in less favourable terms or higher interest rates on loans. However, improving your credit is achievable through consistent efforts, like paying bills on time, reducing debt, and monitoring your credit report regularly for inaccuracies. By taking small, consistent steps, you can rebuild your credit history over time.

Your Next Steps

Navigating the world of car loans doesn’t have to be complicated. By understanding the basics and comparing your options, you can find a loan that fits your budget and helps you get on the road sooner.

Ready to see what your repayments could look like? Use our free Car Loan Calculator to estimate your repayments before you apply. You’ll see how different loan amounts, interest rates, or terms affect your budget, and there’s no sign-up required.