How to finance a car in Australia

So, you’ve found your dream car. Now there’s just the small matter of how you’re going to pay for it.

Should you take out a bank loan or sign up for car dealer finance? What’s the difference? And how do you choose between them? Read on to discover our top car finance tips.

What are the different types of loan?

A car loan – from a bank or a non-bank lender – is a type of personal loan that is used to buy a car. The lender gives you the money to pay for your car, and you pay them back, with interest, over the course of between one and seven years.

Dealer finance, on the other hand, is offered by the car dealership that is selling the car. You pay off the cost of your car, plus interest, over a period of typically three or four years.

Dealer finance can be attractive because of its convenience – sign on the dotted line and you’ll be driving away before you know it. But it pays to do a bit of homework before you agree to anything.

Look at comparison interest rates

It’s important to accurately compare the interest rates you will be paying with different finance options.

A bank, or non-bank lender, will typically offer a lower interest for a car loan than for other personal loans, because the car is used as security. Rates can be fixed or variable. And some lenders offer lower interest rates for electric vehicles and hybrids.

Dealer finance is often advertised at lower interest rates than bank loans. However, you need to consider all the costs of the loan.

When you’re comparing interest rates, make sure you’re looking at comparison rates rather than just advertised rates. Comparison rates also include standard fees and charges – such as establishment, ongoing and dealer agency fees – and will give you a better picture of the true cost of the finance.

Weigh up balloon payments

Dealer finance – and car loans from non-bank lenders – can include a balloon payment of up to 50 per cent of the car’s value. It’s a lump sum that you pay off at the end of the finance period.

Balloon payments have their pros and cons. Say you are buying a $50,000 car, which includes a $10,000 balloon payment. Your monthly repayments will be lower, because they’re calculated on paying back $40,000, not $50,000. However, at the end of the finance period, you have to come up with the remaining $10,000, plus interest, which may make the total cost higher.

Whether this works for you will depend on your personal circumstances.

If you don’t want to (or can’t) pay the balloon payment at the end of your finance period, you may be able to sell or trade in your car to pay off the balloon payment, and buy a new car with a new loan. Or you may be able to refinance (generally not the best option, money wise).

Check for flex – but look out for fees

Bank loans tend to offer more flexibility than dealer finance. They allow you to compare different lenders and choose pretty much any car you like, whereas dealer finance is often limited to new cars.

Bank loans also tend to be more flexible over the life of the loan. When comparing products, you may want to find out whether they allow you to make extra repayments, switch to a fixed rate, pay off your loan early, or redraw.

However, you should also check what fees these flexible options attract. Non-standard fees such as these are not included in comparison interest rates.

Do your homework

In short, it can pay to do some research before agreeing to a bank loan or dealer finance.

You can use a car loan calculator to work out different interest rates and balloon payments that will affect your repayments. Look at comparison rates to make sure you are considering all costs and fees – but also consider what non-standard fees you might have to pay.

And choose an option that suits your personal circumstances and fits within your budget.

^Disclaimer

^{Viva Energy Australia Pty Ltd (“Viva Energy”) has compiled the above article for your general information and to use as a general reference. Whilst all reasonable care has been taken by Viva Energy in compiling this article, Viva Energy does not warrant or represent that the information in the article is free from errors or omissions or is suitable for your intended use.}