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How do car loans work? A complete beginners guide
Car Financing

How do car loans work? A complete beginners guide

David Fahim
March 25, 2020
Contents

How do car loans work?

A car can be a vital part of your life. Often it is your source of transportation that is relied upon by you and other members of your family for work, leisure and everyday life. But cars are expensive and across Australia are the biggest purchase Australians are likely to make, only behind homes; so, you may not have the money available to pay fora car outright, and that is when you may start looking at payment options such as personal loans or car loans. For a quick, no-obligation check to see what is available get your tailored matches in just 60 seconds for further details, but in the meantime here is some more information on your options to guide you with the best rate for you and your financial situation.

A car loan gives you the means to borrow a certain amount of money that you need to buy a car. Then after, in return for the loan, you will need to pay interest to your loan provider/lender. Your loan will come with a set of conditions and one of these will be the time period in which you agree to repay back your car loan, also known as the term. You have a few term options available:

  • 2 Year Car Loan
  • 3 Year Car Loan
  • 4 Year Car Loan
  • 5 Year Car Loan
  • 7 Year Car Loan

The longer the term, the lower your monthly repayments but you will pay more overall as you are paying the interest amount for longer. Calculate approximately just how much your new car could cost you over the term of different loan periods with the newest smart technology in the market.

Car loans vs personal loans, which should you choose?

Personal loans don't have restrictions on what you are borrowing money for, therefore a personal loan with your bank maybe a good option, especially if you have a good relationship with them.

There are significant benefits to taking out a car loan for a car purchase. Car loans are different because they use your vehicle as collateral and secure the loan amount against it. Meaning if you go into defaults of repayments the car can be repossessed. Because car loans are secured, they can offer lower interest rates meaning that the overall cost of repayment is much cheaper than a personal loan. It is easier to qualify for a car loan because the car is offered as collateral, but be sure you understand the terms of your agreement before you agree.

What is a balloon payment?

A balloon loan is a specific type of loan which decreases the monthly repayments, making each installment much lower, but then at the end of your fixed term, you will make a larger one-time payment. It is important to remember that the lower payments may fit your finances better, but you will need to make the bigger payment at the end of the term.

Car balloon loans do have a couple of different alternatives which is what makes them a good option for some people:

  • Pay the balloon amount due and the car is yours to keep.
  • Refinance the balloon amount to continue paying smaller monthly payments in order to keep your car.
  • Trade-in your car, this will depend on the lender. Maybe you will incur additional costs but this is a way to have a new car frequently without a big payout, but your car is never truly yours.

Balloon payments have pros and cons and really depend on your financial situation, why you need a loan and what your plans are at the end of the repayment term.

How much should I use as a car loan deposit?

A car loan deposit is an amount you pay upfront to secure your car and the rest of your loan. The advantage of paying a higher deposit is that your monthly installments will be much less of the term of your loan. The bigger the deposit you pay, the more options you have but as an ideal it is always good to aim for around the 20% mark, the more deposit you pay also sometimes will mean a cheaper rate. Don't forget if you already own a vehicle you can trade this in or sell it first as part of your deposit amount.

Which loan is best; 3, 5 or 7 years?

Choosing a term for your repayment is something you will need to think about. The longer the term the cheaper the monthly repayments will be which is good for some people, but this increases the overall repayment amount as you will be paying more interest for longer. So for the best rate, a shorter term is better. The best thing to do is work out your finances before submitting your application to have a clear idea of how much you can afford to repay monthly, without stretching yourself too much, but neither paying less than you could easily afford so the interest rate is unnecessarily high. Read more on our top tips for smarter car loans.

How to compare car loans

Comparing loans can be an easy process once you have all the details. You will need to know some basic information such as:

  • the cost of the vehicle
  • the amount you can afford as a deposit
  • how much you can realistically spend per month
  • how you plan to use the vehicle
  • your financial situation.

Be prepared before you walk into the dealership, read our tips on how to get better prepared and how to get a better loan.

Once you submit your request through to us, we may need to ask for further details but we will assist you in making your dream car a reality by providing you with a range of affordable finance options at the best rate.

Don't negatively affect your credit score applying for car loans you are not qualified for. At CarClarity, you only fill out 1 application and get matched to 30+ Lenders. You find the car you want, we do all the checks, connect you to only the right lenders for you so you get the best deal every time.

David Fahim

David Fahim is CarClarity's COO, joining forces with two founding team members that share the same passion of helping customers get the right car loan.

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