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What is a new car loan?

If you're in the market for a new car but your savings don't quite cover the purchase price upfront, a car loan could help you get behind the wheel sooner.

A new car loan is a type of personal loan that enables you to finance a new car that's typically under a certain age. New car loans are generally reserved for vehicles up to five years old, with some lenders restricting the age limit to three years.

When you take out a new car loan, the loan provider will lend you the money you need to cover the purchase price. You'll then repay the loan amount, plus interest, in regular instalments over a predetermined period of time.

What are the benefits and risks of new car loans?

When deciding whether a new car loan is the right choice for you, it's important to weigh up the pros and cons in order to make an informed decision.

  • A new car loan could allow you to extend your budget so you can afford the car you want, when you need it.
  • It may be easier to secure finance for new cars, particularly for brand new cars, as they tend to pose a lower level of risk to the lender than used cars might.
  • A new car will typically qualify for a secured car loan, which will likely have a more competitive interest rate than an unsecured car loan.
  • Buying a new car with finance means paying interest on the amount borrowed throughout the duration of the loan term.
  • New cars are generally more expensive than used cars, which could mean higher repayments, a longer loan term, or both.
  • If you neglect to do your calculations and carefully consider how your car loan repayments will fit into your budget, you could risk getting yourself into financial strain.

Who has the best new car loan rates in Australia?

While there's no such thing as a single best car loan rate or provider for everyone, making a comprehensive comparison can allow you to narrow down your loan options to only those that best match your personal financial situation and needs.

Your credit score will also affect the kind of interest rate you may be offered, so it might be worth giving it a boost if it has room to improve.

Another thing to keep in mind when looking for the best new car loan rate available to you, is that new car loans may mean a bigger loan amount, but on average have lower interest rates than used car loans, meaning they are often already competitive.

Is interest paid on a new car loan tax deductible?

If you take out a car loan to buy a vehicle that will be used for business purposes, you could potentially claim some of the expenses on your tax, including operational expenses like fuel and oil, repairs and servicing, lease payments, insurance premiums, registration, and depreciation.

You may also get a tax deduction on the car loan interest if you’ve taken out a chattel mortgage, where the vehicle acts as the security for the loan. On a chattel mortgage (like a property mortgage), you’re listed as the car’s owner, allowing you to claim the car loan on your tax return.

But remember, no matter what kind of car loan you decide to take on, you can only claim tax benefits if you use your car for business purposes.

Is a new car loan the same as a used car loan?

As a whole, new car loans and used car loans are finance options that function in much the same way. However, there are a few differences between the two, including:

  • Age restrictions - New car loans are typically available for the purchase of cars aged up to three or five years, depending on the lender. Meanwhile, used car loans may be available for the purchase of cars up to 12 years old.
  • Interest rates - New cars are typically considered to pose less of a risk to lenders than used cars, which can often mean a new car loan offers lower interest rates than a used car loan.
  • Security - New car loans tend to be secured against the car itself, while used car loans may have certain criteria that need to be met for a car to be eligible for use as collateral - such as the condition and age of the car. The main benefit of securing your loan is that it will typically allow you to access lower interest rates.

Are all new car loans the same as green car loans?

Green car loans are different to new car loans in terms of the kinds of vehicles that meet the eligibility criteria.

Green car loans can only be used to buy electric, hybrid, or fuel-efficient cars - i.e. 'green' cars.

Generally speaking, a vehicle that has lower carbon dioxide emissions than other cars of a similar size could be considered a green car. This may include:

  • Low-emissions vehicles
  • Battery electric vehicles
  • Hybrid electric vehicles
  • Plug-in hybrid electric vehicles
  • Certain new cars with a high standard of fuel efficiency

Certain new cars may meet the eligibility criteria for both a new car loan and a green car loan, but there are also plenty of vehicles that may only meet the conditions of one or the other.

What to look for when comparing new car loans

Comparing your options is a key part of choosing a new car loan. Here are some of the most important features to consider:

Secured vs unsecured loan - New car loans are most commonly secured by the car itself. It may be possible to buy a new car with an unsecured personal loan, but the interest rate will likely be higher.

Interest rates - The loan's interest rate will determine how much you pay in total interest charges. You'll also need to consider whether a fixed rate loan or variable rate loan is the best choice for you. Fixed interest rates will stay the same throughout the life of the loan, while variable rates can fluctuate with the market.

Fees - There are a number of upfront and ongoing fees you may be charged on top of your interest payments, some of which include: 

  • Loan application fees
  • Establishment fees
  • Monthly fees
  • Late payment fees
  • Early repayment fees
  • Exit fees

Comparison rates - In order to get a better idea of the total cost of the loan, consider the different comparison rates on offer. A loan's comparison rate includes the interest rate plus any standard fees payable.

Extra features - Some lenders offer extra features that may appeal to you, such as the option to make extra repayments in order to pay down your loan faster, and a redraw facility that allows you to withdraw any additional repayments you've made if you need to.

Loan term - The loan term is the length of time you have to pay off the loan amount plus interest charges. Car loans tend to have loan terms of three to five years, but sometimes longer or shorter terms are available. Keep in mind that generally, the longer the loan term, the cheaper the repayments, but the more you'll likely pay in interest.

How much will your car loan repayments cost?

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How do you finance a new car?

  • Secured Car Loans: Car finance where you provide collateral, typically the car itself.
  • Unsecured Car Loans: Car finance where you don’t provide collateral.
  • Balloon payment: A car loan repayment option where repayments are divided up so that they begin smaller, with the borrower paying a lump sum portion of the loan (often around 25 per cent) at the end of the loan term.
  • Chattel Mortgage: A specialist car finance option for business use.
  • Operating Lease: More like a long-term car rental arrangement, involving a company leasing a car for an extended period.
  • Commercial Hire Purchase: Closer to a rent-to-buy arrangement, generally involving a finance company buying a car on your behalf and letting you use it in return for regular rental payments. After a certain number of payments, you may own the car.
  • Car Lease: Like a commercial hire purchase, but with more options. You rent the vehicle for a set period, and at the end of the lease you have the option to either return the car or buy it for an agreed amount.
  • Novated Lease: Like a car lease, but with a more complicated ownership structure as you acquire the car from a second party (usually an employer) which in turn leases it from a third party (a finance company).

Can you refinance a new car loan?

Refinancing a car loan simply means switching from one car loan to another, usually with a different lender. This could be done to access cheaper interest rates, lower fees, or easier payment options to help you pay off your car loan sooner.

It is possible to refinance a new car loan, and it's a fairly simple process - much the same as applying for an initial car loan. 

The way it works is that a borrower with an existing car loan submits an application for a new car loan that they've selected. Once approved, they will use that money to pay off the initial car loan with their current lender, then simply start making repayments on the new loan.

If you're considering refinancing your car loan, just be sure to do your research, compare your options, and consider any early exit fees or establishment fees you may incur by switching from one lender to another. 

Consider using RateCity's switch and save car loan calculator to get an idea of how much the monthly repayments might cost on a new loan with a different interest rate. You might also like to visit our credit score hub to check your credit history and ensure it's in good shape before applying for a new loan.

What is a secured car loan?

A secured car loan is a loan that is connected to a form of security, or collateral. Generally, the security for a car loan is the car itself. If you fail to repay the loan, the lender might seize your car, sell it and then use the proceeds to recover their debt.

Where can I get a student car loan?

Student car loans are not a necessarily a product in and of themselves, but what you may be looking for is a guarantor car loan.

A guarantor car loan has a third-party act as a form of guarantee for your loan application, telling the bank or lender that if you default on your loan, someone will pay the loan repayments.

Going guarantor on a car loan is no new thing, and before internet-based credit scores, guarantor car loan applicants would apply for loans with a guarantor or property owner who could vouch for the person borrowing the loan.

To get a guarantor car loan, you’ll need someone willing to act as a guarantor for your car loan.

What is an unsecured car loan?

An unsecured car loan is a loan that is not connected to a form of security, or collateral. Not all lenders provide unsecured car loans – and if they do, they generally charge higher interest rates for their unsecured car loans than their secured car loans.

How to find a great car loan

Historically, finding a great car loan would require excess research ranging from visiting an excess of websites or making phone calls, but technology has moved on. Using RateCity, Australia’s leading financial comparison service, you can check out great deals from a range of lenders on the one site.

To start, select the amount you want to borrow and the length of the loan, narrowing your search to show just fixed or variable interest rate results.

Once you’ve indicated your search criteria, you’ll see an immediate list of lenders, ranked by interest rate or application fees. You’ll also be able to view the monthly repayment amount for each result, helping you to know what you can afford.

Up to six products can be compared side-by-side, complete with more information about each car loan, giving you more information about your options.

When comparing your car loan options, it’s ideal to keep in mind some points find a great car loan for your needs. Consider the following:

  • Choosing a low interest car loan can reduce costs
  • Selecting an option with low fees and charges is ideal, because these can really add up
  • Be aware of penalties, such as early exit penalties if you pay off the loan sooner than expected
  • Consider the features that best suit your situation

There are many ways to ensure that you get a great car loan. Ultimately, you’ll end up with the best deal by doing your research and selecting the most suitable product for you.

How do you get a car loan?

There are four different ways you can get a car loan. You can go straight to a lender. You can get a finance broker to organise a car loan for you. You can get ‘dealer finance’ – which is when the car dealer organises a car loan for you. Or you can organise your own car loan through a comparison website, like RateCity.

Whichever method you choose, you will need to provide proof of identification, proof of income and proof of savings. So you may be asked for any combination of passport, driver’s licence, bank statements, payslips, tax returns and utility bills. You might also be asked to provide proof of insurance.

This article was reviewed by Head of Content Leigh Stark before it was published as part of RateCity's Fact Check process.