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What is a used car loan?

A used car loan is a type of personal loan that enables you to finance a second-hand car that's typically over a certain age.

When you take out a used 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 can you use a used car loan for?

In Australia, many lenders will offer separate car loan products for new cars and used cars. New car loans are typically reserved for vehicles up to five years old, with some lenders restricting the age limit to three years.

If the car you want to purchase exceeds these age limits, you may need to opt for a used car loan. Keep in mind that used car loans often also have a limit to how old the car can be. This will differ from one lender to the next, but is often 10 to 15 years. One of the main reasons for this is that lenders want to be confident that the car you're buying will outlive the length of the loan.

How do you compare used car loans?

Just like new car loans and other personal loan products, there are a range of factors to consider when shopping for used car finance. Some of which include the following:

Secured vs unsecured

A secured loan is guaranteed against the value of an asset which is used as collateral if you default on your loan. Car loans are one of the most common forms of secured personal loans, as the car itself can be used as security. Secured car loans will generally have lower interest rates than unsecured car loans, as they are deemed less of a risk to lenders.

When it comes to used cars, one thing to keep in mind is that the age and condition of the car will play a part in the determining whether you might be eligible for a secured loan. If the lender isn't confident that the value of the car is enough to secure the loan amount, you may need to opt for an unsecured loan.

Interest rates

Car loan interest rates determine the amount a borrower will pay in interest charges over the life of the loan. If you opt for a fixed interest rate, your interest payments will remain the same throughout your loan term. While if you choose a variable rate, it's likely to fluctuate over time, in line with the market. As a result, fixed rates can often make budgeting more manageable, but variable rate loans tend to offer more flexibility.

Secured car loans will generally have lower interest rates than unsecured loans, and similarly, new car loan rates tend to be lower than used car loan rates. This is due to the level of risk posed to the lender.

Another factor that can influence the interest rate you may be offered is your credit history. The most competitive interest rates tend to be offered to those with excellent credit scores.

Comparison rates

Low rates can sometimes come with high fees, so it's important to consider both. Comparing different comparison rates can help you get a better idea of the total cost of the loan, as the comparison rate will include the interest rate plus any standard fees. 

It's worth noting, however, that there may be some fees that aren't included in the comparison rate. Be sure to check all of the fees and charges payable on the loan you're interested in.

Extra Features

Some of the extra features that may be available on certain loan products include:

  • Extra repayments - You may be able to make extra repayments on top of your regular repayments in order to pay down your loan faster.
  • A redraw facility - This allows you to withdraw any extra repayments you've made if you need to.
  • Flexible repayment options - You may be able to choose whether you want to make weekly, fortnightly or monthly car loan repayments.
  • Balloon payments - More commonly offered upon purchase of a new car, a balloon payment allows you to reduce your regular repayments by making a large lump sum payment at the end of your loan term.

Fees

The types of fees you may be charged tend to vary from one lender to the next, but may include any of the following:

  • Application fees
  • Establishment fees
  • Monthly Fees
  • Other ongoing fees
  • Early repayment fees
  • Late payment fees
  • Redraw fees
  • Early exit fees

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. When it comes to used cars, the age of the car might affect the length of the loan term that's available to you.

Generally, the longer the loan term, the cheaper the repayments, but the more you'll likely pay in interest. Shorter loan terms might have more expensive repayments but less interest payable over the life of the loan.

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Is it better to buy a used car or a new car?

There are benefits and disadvantages to both new and used vehicles. Whether it's better to buy new or used will ultimately depend on your personal circumstances. Here are some of the pros and cons of each that may be worth considering:

Used vehicles

Pros:

  • Generally more affordable.
  • Gives you the opportunity to secure the make and model you want with a restricted budget.
  • The depreciation rate is lower than that of a new car.

Cons:

  • May have a harder time getting approved for finance.
  • Older cars may have limited loan options available.
  • Likely to pay a higher interest rate on a used car loan.

New vehicles

Pros:

  • Likely easier to obtain finance with plenty of options available.
  • Typically charged a lower interest rate on a new car loan.
  • Ability to use the car as security on the loan.

Cons:

  • Greater rate of depreciation.
  • More expensive to buy means a bigger loan which will likely take longer to pay off.
  • May be restricted by budget on the kind of car you want to buy.

What else should you consider when buying a used car?

Buying a used car comes with a number of considerations and expenses that are important to keep in mind when you're shopping around. Some of these include:

  • Budgeting for car ownership costs such as maintenance, fuel, car insurance and registration.
  • The possibility of having to repay a car loan if the car stops working or is written off. It might be worth looking into insurance that could help cover you in this situation.
  • The difference between buying from a dealership and a private seller. There are a few extra things to think about when looking into private sale listings, including making sure the car is unencumbered.

How to find the best used car loans for you

Searching for a suitable used car loan might sometimes feel overwhelming. But, RateCity has a number of comparison tools that may take some of the hassle out of the process.

Comparison tables

RateCity's comparison tables, like the used car loan comparison table on this page, allows you to compare the loan options that match your requirements. Simply use the filters to narrow down your search to the loan products that best suit your needs.

Car loan calculator

RateCity's car loan calculator can give you an estimate of how much your monthly repayments may cost based on your preferred borrow amount, interest rate and loan term. It can also provide you with an estimate of the total cost of the loan and total interest payable.

Real Time Ratings™

Real Time Ratings™ is a world-first rating system that ranks car loans based on your individual lending requirements. It gives each car loan a score out of five stars, based on loan costs and flexibility.

Before you get started on your loan application, don't forget to check the eligibility and lending criteria, read the product disclosure statement (PDS), and check for any disclaimers.

For information specific to your personal financial situation, consider reaching out to a financial adviser or personal loan broker.

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This article was reviewed by Personal Finance Editor Mark Bristow before it was published as part of RateCity's Fact Check process.

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.

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.

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.

What is a guarantor car loan?

A guarantor car loan is a type of loan that features a guarantor on the agreement. The guarantor is a third-party individual, often a friend or relative, who guarantees the loan will be repaid if the borrower defaults on the car loan.

Guarantor car loans are often geared at people who might otherwise struggle being accepted for a secured car loan when purchasing a vehicle. Some of the reasons might include a lack of credit history such as with a student or young person, if there’s bad credit, or age as a factor such as with pensioners.