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Learn more about car loans

What is a used car loan?

Used car loans are personal loans used to finance the purchase of a second-hand vehicle.

How do used car loans work? 

Similar to new car loans and personal loans, used car loans involve borrowing a set amount of money, and paying it back with interest over an agreed period of time, known as the loan term.The loan is used to buy a used car, rather than a new car.  

What is considered a ‘used’ car? 

A used car is technically defined as any car that has been previously registered in Australia. Buying a used car allows you to keep costs down and to avoid the depreciation associated with buying a new car. That’s because you can lose thousands of dollars in market value the moment you drive a car out of the dealership. 

What are the different types of used car loans? 

Used car loans can be secured or unsecured, and have either fixed or variable interest rates. The sort of car purchase they fund can vary. Some lenders only offer loans on used cars up to a certain age, often up to five years, as they consider older cars too risky to finance.  Others may consider offering loans on older cars if they hold their value.

Secured used car loans 

A secured car loan is a personal loan that is guaranteed against the value of an asset, usually the car itself. If you can’t pay it off, the lender may seize the asset and sell it to cover their losses. Secured loans are less risky than unsecured loans, so interest rates are typically lower.

Can I get a secured loan using my car as collateral? 

Some lenders will not offer secured loans for used cars, or only offer loans for particular vehicle models or those under a certain age. You will need to check with the lender whether you can get a car loan for the second-hand car you’re considering buying. If the car doesn’t qualify as security, you might still be able to secure your car loan with some other asset, such as property, or you could opt for an unsecured car loan instead.

Unsecured used car loans

Unsecured loans do not require collateral. This means if you default on your repayments, the lender can’t repossess your vehicle, or any asset you may have used as collateral on a secured loan. These types of used car loans often have much higher interest rates than secured loans, since they are higher risk to the lender. 

Variable vs fixed interest rates 

Now you know the difference between secured and unsecured used car loans, it’s time for you to think about whether fixed and variable interest rates will work best for you.

Variable interest rate loans 

The interest rate on a variable loan may rise or fall over the term of the loan. These interest rate changes can be influenced by the cash rate set by the Reserve Bank of Australia (RBA) and the lender’s own funding costs. If you decide to take out a variable used car loan, you should budget for higher repayments just in case your lender raises the interest rate during the loan’s term.

Fixed interest rate loans 

Fixed rate car loans lock the borrower into the same interest rate and repayments over the life of the loan term. Fixed rate loans can help you avoid any financial stress should interest rates rise. As you’re locked into a set rate, the lender can’t make any unexpected changes to your repayments. However, if your lender reduces their interest rates, you won’t enjoy any savingsavailable with variable interest rate loans.  

The interest rate on fixed loans may be higher than rates on variable loans given the certainty they offer. Much like insurance, you need to pay a little extra to protect against the risk of rising interest rates. Another potential negative of fixing is that you may lose flexibility around how you repay your used car loan. Extra fees such as break costs may apply if you try to repay your car loan earlier than agreed or financial penalties may apply if you make extra repayments. 

Is it better to buy a used car? 

New and used cards have both pros and cons, and the choice of which car is better depends on a variety of factors, including your financial situation and what you want.  

New vs used car loans 

The main difference between new and used car loans is the financial risk associated with financing the purchase of a second hand vehicle. 

When comparing new and used car loans, you need to consider: 

Interest rates: In most cases, you are more likely to pay a higher interest rate for a used car loan than you would for a new car loan. This is because most car loan lenders consider used cars a greater financial risk, as they have more wear and tear. Used cars are less likely to last for the lifetime of the loan, which is why lenders charge extra interest to protect themselves from potential loss. 

Depreciation: New cars can be impacted significantly by what is known as depreciation. Most new cars reduce in value by around 30 per cent in the first two years after purchase, and can lose thousands of dollars in value as soon as they leave the dealership. With a used car, the previous owner has already absorbed the depreciation, and therefore you can save money on the purchase price and therefore, on the total loan amount. 

Loan amount: Used cars often cost less to buy than new cars, so you probably won’t need to borrow as much money than if you buy a new one. A lower loan amount can will mean more affordable repayments and you pay less in interest costs over the lifetime of the loan compared to buying a new car. 

Is a used car loan different from a new car loan?

There are a few differences between used car loans and new car loans. New car loans typically come with eligibility criteria around the age of the car - generally available for cars one to two years old. Used car loans may be available for vehicles up to five or six years old and may be better suited to those who cannot qualify for a new car loan. 

You may also find a lender is willing to offer a lower rate for a new car. As mentioned earlier, this is because used cars are generally considered a greater financial risk as they may not last the length of a car loan. 

Which bank is best for a used car loan? 

Australian car loan lenders have different criteria to help them determine whether a car counts as new or used, and to estimate the level of risk involved. For example, some lenders count any car less than two years old as new, while some lenders count all cars over five years old as used.

Comparing used car loans

As with any large purchase, it’s crucial to shop around and compare car loans. The most important thing is to first work out how much you want to borrow and the duration of  your loan. Then you can compare used car loans in regards to interest rates and security. 

Once you have this information, you can start to estimate your car loan repayments and get anidea of what you can afford. You will pay interest on the amount you borrow, along with various fees and charges, which you will need to investigate. 

Creating a car loan budget 

When you create your car loan budget, you need to consider: 

  • Cost of the car 
  • Car insurance fees 
  • Registration fees / stamp duty tax 
  • Repairs and maintenance 
  • Fuel & road tolls 
  • Membership to roadside assistance organisations 
  • Monthly car loan repayments 
  • The loan term 
  • Car loan fees & interest

In other words, buyers and borrowers must consider the full costs of owning the car including the financial liabilities, before determining whether they can afford it.  

Things to look out for when getting a used car loan 

Getting a used car loan can be a complex and timely process, but it’s important to get all the facts before signing anything. If you’re unfamiliar with the loan approval process, there are a few things you need to be aware of:

Extra fees and charges 

As well as paying interest on your used car loan, you will most likely also pay fees and charges. These can include application fees, annual fees, early exit fees, ongoing monthly fees and more. It is important to read the Product Disclosure Statement (PDS) and check your lender’scredit guide or any relevant fact sheets before you sign on the dotted line.  

It’s also important to check whether your lender charges fees for making extra repayments, to account for the interest they will lose. Commonly found on fixed interest rate loans, these fees can also affect variable interest rate loans, so check the fine print.

The comparison rate 

As a helpful guide to total cost, you can also look at a loan’s ‘comparison rate’. From July 2003, the Australian government made it mandatory to display a loan’s comparison rate alongside its advertised interest rate. This bundles the advertised rate along with the main fees and chargesin a single interest rate. This is to give borrowers a more accurate understanding of what theloan will cost – although this rate does not include every cost, nor does it account for added rewards or benefits that may impact your decision.

Redraw facilities

Some used car loans will also offer what is called a redraw facility. If you are ahead in your repayment schedule, and find yourself in financial difficulty, you can “redraw” any extrarepayments. As with all financial products, it is worth asking if the lender has any restrictions on how exactly this redraw facility is used.  

Safety inspections

In Australia, if you are buying a used car, it’s important to check the history of the car, in case it has been written off or damaged previously. The Personal Property Security Register (PPSR), formerly known as REVS, helps to protect consumers buying used cars. A PPSR search is a basic check for financial interests, written-off records and stolen vehicles, so you can be aware of the history of the car before you buy it.

Used car insurance

Loan protection insurance is often sold as an add-on in car dealerships, to help you make repayments if you experience financial difficulties. If you feel you will struggle to make your repayments, it may be wiser to save a larger deposit, and borrow a smaller loan amount than pay for insurance. However, if you would like the reassurance of loan protection insurance, shop around. Dealership insurances can have high fees, so comparing used car loan insurance could save you money in the long term. 

What happens to your used car loan if your used car stops working?

While your car legally must be roadworthy and service must be carried out in accordance with the Australian Consumer Law, it’s still common that used cars will break down or be written off. This is where having car insurance may be able to lend a hand.

If you have financed the purchase of a used car through a loan and the car is written off, if you have comprehensive car insurance the insurer may be obligated to pay the car loan lender the remaining loan debt. 

Be aware that there may be a gap between the amount an insurer will pay out and the remaining loan debt. This is why it may be recommended that you purchase motor equity insurance if you are financing a used vehicle. Motor equity insurance covers the shortfall a borrower owes to a lender if a vehicle is written off, and the comprehensive car insurance does not cover repayment of the outstanding loan debt.

Can your credit score impact used car loan rates?

Yes, your credit score may impact the car loan rate a lender offers you. This is because each car loan lender has their own set of eligibility criteria, which typically involve having a good to excellent credit score to qualify.

Generally speaking, car loan lenders may reserve their most competitive used car rates for borrowers with excellent credit scores. This is because these borrowers present the lowest level of risk to the lender, and therefore the lender does not need to balance this by charging a higher interest rate in case the borrower defaults on the loan. 

This is also true of financial products across Australia, including credit cards and home loans. If you’re considering taking out a loan but know that your credit score needs improvement, it may be worth taking time to boost it before you apply

Frequently asked questions

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.

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 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.

What is a car loan?

A car loan, also known as vehicle finance, is money that a consumer borrows with the express purpose of buying a vehicle, such as a car, motorbike, van, truck or campervan. Car loans can be used for both new and used vehicles.

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 a guarantor on a car loan?

A guarantor on a car loan is a third party, usually a relative or friend, who guarantees to meet the repayments of a loan for the purchase of a car, if the borrower/owner of the car defaults on the loan.

Guarantor car loans can be useful for people who would otherwise struggle in being accepted for credit to purchase a vehicle. These may include people with bad credit, students and young people who may have no credit history, as well as some pensioners.

Many lenders offer guarantor car loans, guarantor personal loans and guarantor home loans, because of the significantly reduced risk to the lender.

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.

Can I get a no credit check car loan?

You may be able to get a no credit check car loan in certain circumstances, although it’s important to weigh up your options before doing so.

Most lenders refuse to provide no credit check car loans, because they don’t want to give loans to borrowers without first confirming that they have a track record of repaying debts. So any lenders that do provide no credit check car loans would take measures to protect themselves against the risk of default.

That’s why no credit check car loans have higher interest rates than other car loans. Also, borrowers often have to provide security and put down a larger deposit.

Can I get a discounted student car loan?

Being a student is tough enough, and while you might find the odd student discount on movies and technology, the same can’t be said about car loans, as you can’t really get a discounted student car loan.

Lenders make money on the interest and fees that they charge with loans, and the lowest interest and fees are given to the most reliable credit holders: people with excellent credit history.

As a student, you are unlikely to have enough on your credit report to warrant an excellent history. There are however, ways of getting a lower interest car loan if you can’t get an interest-free loan from the bank of mum and dad. One way of doing this may be through getting a guarantor car loan, which can get you a secured car loan by setting your parents up as guarantors.

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.

Can I get a car loan with poor credit?

Poor credit doesn’t necessarily mean you won’t be able to get finance for your car purchase, though your options aren’t likely to be the same as someone with good credit.

In fact, a number of specialist lenders exist offering car finance for customers with poor credit, able to provide access to bad credit car loans.

However having a history of poor credit will likely mark you as a potential risk to lenders, so your car financing needs could see higher fees and interest rates. Alternatively, consider a secured car loan, which is a type of loan that uses the car you purchase as collateral, reducing the risk.

Other options include getting someone close to act as a guarantor for your car loan, or to talk to a broker about a personalised rate specific to your circumstances.

What are the pros and cons of guarantor car loans?

Like all things, there are positives and negatives to guarantor car loans, though one may outweigh the other depending on your needs.

Guarantor car loan pros may include that you’re more likely to be approved for a long if you have no credit or a history with bad credit, that you’re more likely to secure a car loan with a lower interest rate, and that because your guarantor car loan is based on a relationship, you will be more inclined to meet your repayment schedule.

However, there are negatives, as well. Guarantor car loan cons may include leaving a detrimental mark on a personal relationship with added strain if you don’t meet your repayments, and you may take out a loan that you can’t actually afford.

Weighing these pros and cons will give you a greater understanding of whether a guarantor loan is ideal for your circumstances.

Where can I find lenders who offer no credit check car loans?

There are companies that claim to offer no credit check car loans. However, you may find that companies that offer no credit check car loans have high fees and high interest rates.

You might be better off finding a specialist lender who will look at your credit history and income, who will decide whether or not you are able to responsibility pay back the loan. Alternatively, you could contact a car finance broker.

Can I buy a car as a student?

Buying a car is a huge financial decision, and shy of marriage and purchasing a house (or perhaps around the world travels), it may be the biggest financial decision you make. But if you’re looking at your empty pockets, don’t despair! Your dream of owning your own car could become a reality, if you look for and compare the right car loans for your circumstances.

Where can I find lenders who offer no credit check car loans?

You can find lenders who offer no credit check car loans through comparison sites like RateCity or by doing an online search.

One thing to bear in mind is that lenders who offer no credit check car loans are likely to charge higher interest rates and higher fees than on car loans that include a credit check. Also, lenders who no credit check car loans might expect you to pay a higher deposit. You might also be expected to provide security.

Lenders regard no credit check car loans as riskier than other car loans, which is why it’s a niche product that often features special conditions.

How much is your car worth?

If you already own a car, you could potentially bring down the cost by selling your car in the process. Before that happens, though, you’ll need to find out how much your car is worth.

One of the first places to find this value is to research the value of your current car, giving you an idea of roughly how much it’s worth in its peak condition.

There are plenty of websites that offer a free online valuation, allowing you to enter your car’s make, model, year, badge and description, with results listing a price guide based on both selling your car privately and through a dealership.

Of course, dealerships will try to profit on your trade-in by buying it for less than they can sell it, making it highly unlikely that you’ll get the same price selling a car to a dealer as you would selling a car privately.

However, private car sales can be costly and can take months to sell, making car trading more convenient with a guaranteed return, even if you may not be able to realise the total value of your car’s worth.

Remember that everything is negotiable. If the dealership is offering you less for your trade than you wanted, try to negotiate elsewhere to gain that money back. Start by negotiating on the price of the trade and then ask them if they can give you a further discount on your new car.

What is collateral?

Collateral, or security, is an asset you agree to surrender to a lender if you fail to repay a loan. Generally, the collateral for a car loan is the car itself. So if you fail to repay the loan, the lender might seize your car, sell it and then use the proceeds to recover their debt.

Can I get a car loan with bad credit?

Yes, you can get a car loan with bad credit, although you’ll probably find the process trickier and dearer than that experienced by people who have good credit histories.

You can find a number of lenders that specialise in bad credit car loans. However, make sure you compare bad credit car loans before you sign on the dotted line, because not all car loans are alike and having bad credit may mean you are more likely to be hit with higher fees and interest rates.

If you have bad credit, it’s important not to take out a car loan unless you can afford the repayments because a default could further damage your credit rating. Conversely, if you make all the repayments and repay the loan successfully, your credit rating might improve.

How to apply for pre-approval of a car loan from RACV?

If you’re planning to apply for a car loan with RACV, the best way to start is by having a clear picture of your requirements. By getting pre-approval on your car loan, you’ll be able to go shopping for your new car with a definite budget that will help you narrow your search. Once you’ve decided to buy a car with the help of a loan, you may have even identified the type of car you would like to purchase, you can seek pre-approval on a car loan from RACV. 

You can apply for pre-approval by filling out a form online and uploading the relevant documentation regarding your identification, income, debt and credit history. Once you submit your application, RACV will review and verify the documents. If you meet their eligibility criteria, you will get pre-approval for the amount they are willing to lend to you. With this pre-approval, you can go car shopping with the confidence of knowing what you can afford.

Can you get a chattel mortgage with bad credit?

Getting approval for a chattel mortgage with bad credit may be possible, given ‘chattel’ (usually a piece of equipment or car) is put up as security for the loan. That means if you fail to repay the loan, the creditor can recover the loaned amount by repossessing and selling the car or piece of equipment. This differs from unsecured car loans, where the asset is not tied to the loan and cannot be taken if you don’t meet the repayments.