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How Does Car Finance Work?

Owning a car is a rite of passage and an investment that you’re likely to think of doing at some point in your life. If you are in the market for a new or used car, there are several financing options available to make the process easy, without having you burn a hole through your savings. Before you jump the gun and sign up for a financing option, it’s important to understand the basics of what car loans are and how they typically work.

What is a car loan?

A car loan, also known as a vehicle loan, allows you to borrow a certain sum of money to purchase a new or used vehicle – be it a car, van, truck or anything else. In return for the loan, you pay interest to the financial institution that lent you the money. You can use a car loan calculator to work out approximately how much your car will cost you over the term of your loan. It is important to pay back the loan within a certain time period of time which can range from three to five years. You get to pay back the loan, usually in monthly instalments.

What is a car loan?

There are 4 major types of car financing options available to customers in Australia.

1) Unsecured personal loan

An unsecured personal loan is a loan product that helps the borrower gain a lump sum of the money. Since there is usually no security or asset tied to the loan it carries a higher than usual interest rate.

2) Secured car loan

One of the most common types of a car loan is a secured car loan, which is granted specifically to an individual or dealer directly to pay for a car and take ownership immediately. This loan is secured by the asset being purchased and that is why the interest rates are usually significantly lower than unsecured car loans.

3) Chattel mortgage and hire purchase loans

These loans are meant for business customers who use their car for business purposes. These loans are like secured loans, wherein the business takes out a loan and pays the car off over time. Hire purchases are functionally the same, but car ownership rests with the bank or lender during the loan term instead.

4) Car leasing

This is the fourth financing option wherein a financial institution purchases and owns the car on your behalf. You simply pay a monthly fee in order to use the car and then have the option to purchase it later on.

How can you get the best car loan?

It is important to make sure that you compare car loans from different lenders. Look for important pointers like interest rates, charges and the amount you’ll have to pay on a regular basis. It is also important to seek advice from a car loan expert to assess what external factors can affect your interest rate.

What makes a good car loan?

A good car loan is the one with the lowest interest rate and little to no fees (low comparison rate) is best. Be very careful with false advertising from some of the lenders that tout a low rate on the loan but make up for it with exorbitant fees instead. It’s essential to look at the comparison rate as well, since the comparison rate can affect the upfront and ongoing fees.

In the end, it’s really important to consider the price of the car you intend to buy and whether or not it is realistic that you’ll be able to pay it off with your budget. So, make sure you compare the features of similar car finance products on the market to find the one that suits you.