How to finance a car: the complete guide to vehicle financing options
If you’re buying a car, you’ll either need to have saved up the full purchase price, or you’ll need to find a way to finance it. While most Australians will buy a car using dealership finance or a car loan, these aren’t your only options.
What is financing a car?
‘Financing’ simply means acquiring the money needed to purchase something, usually from a third party. So, when someone refers to financing a vehicle, they’re often talking about things like loans.
How it works
Depending on what type of car financing you choose, the process will differ. Although, the basic principles will remain the same: you borrow money to make the purchase, then pay it back with any interest you’ve accrued in the meantime.
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What types of vehicle finance can I get in Australia?
While it’s common for people to borrow money from a bank or lender (ie. a car loan or personal loan), some prefer to buy a car using dealership financing.
But these aren’t the only routes you can take to car ownership – some of the less-common ways of funding your new car purchase could work just as well for you, depending on your situation.
Car loans
Car loans are designed specifically to help you finance the purchase of a vehicle. These types of loans can be used to buy new or used cars and give borrowers the choice between fixed and variable interest rates.
Generally speaking, car loans are available for 1 to 7 years, and could let you borrow anywhere from $1,000 to over $200,000, depending on the lender and your personal finances.
Car loans typically offer a range of flexible features, such as extra repayments to help you pay off your loan faster, redraw facilities, and flexible repayment schedules (e.g. weekly, fortnightly or monthly).
Just note, car loans are usually a ‘secured’ loan, meaning you may need to use the vehicle you’re purchasing as collateral for the loan. If that doesn’t sound like something you want, then consider checking out an unsecured personal loan or exploring the other options available.
Personal loans
If a secured car loan isn’t up your alley, then a personal loan might help you finance your next car purchase.
These types of loans can be used for all sorts of purposes, but are often unsecured, meaning you won’t have to use your new car as collateral for the loan. As a result, you may need to pay a higher interest rate for the extra risk your lender takes on.
Like car loans, personal loans often have a range of useful features to help you pay down your loan faster and save money on interest (e.g. additional repayments, redraw facilities, and flexible repayment frequencies).
Dealer finance
When you’re buying a new car from a car dealership, you’ll get asked how you plan to pay for it. If you don’t have a car or personal loan ready to go, then you may opt to use dealer financing.
This is a type of loan offered by dealerships that could help you drive off the lot same-day in your new car.
Dealer financing is generally considered to be convenient and negotiable, with lower interest rates than most car or personal loans.
However, this type of financing is usually only available for new vehicles, and any savings made due to those low interest rates might be negated by a balloon payment – a lump-sum repayment – at the end of the finance period.
Non-loan car financing options
- Mortgage redraws: If you’ve made extra repayments on your home loan and have the ability to redraw them, then you may opt to use the funds in your redraw facility to purchase a car outright.
- Credit cards: For those that only need to borrow a small amount to pay for a car, a credit card may be an option. Although, this is a higher interest option and should only be used if the money can realistically be paid back quickly.
- Car leasing: Can’t commit to buying a car? You could try a car lease. This is where 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.
- Novated leasing: If your employer allows it, a novated lease is a form of salary packaging whereby some of the cost of leasing the vehicle comes out of your pre-tax income and is paid to the finance provider. Novated leases can help reduce your taxable income.
Dealer finance vs bank finance: the pros and cons
Want to compare dealer finance with what's on offer from banks and lenders? Check out our full rundown of the pros and cons of both options.
Dealer finance
| Pros | Cons |
| Convenient because application and purchase of the vehicle can be done on the same day. | Only for new vehicles. |
| Often offer low rates of 1% or below, meaning you make lower repayments. | Balloon payments are often a requirement due to lower interest rates. |
| Sometimes you can negotiate with the dealer as they ultimately want you to finance with them. They may even try and beat any car loans you mention to them to get you over the line. | Chance of higher sales price of the car due to the lower interest rates. |
Bank finance
| Pros | Cons |
| You can finance both new and used vehicles. | Banks charge higher rates. |
| There are many lenders to choose from, from more traditional banks to customer-owned or online options. | Lenders can have longer approval times ranging from a few hours to several days. |
| Flexible options, including switching from a variable to a fixed rate, refinancing to a more competitive product or changing your repayment frequency. | Less room to negotiate as lenders are unlikely to change features of the loan on offer. |
Car finance traps and tips
When you’re choosing a car finance option, there’s a few traps you could fall into that might mean you spend more money than you need to. Here are some of the common traps and some tips to help you navigate financing your new car purchase:
Trap #1 Interest rates and fees
It pays to shop around when you’re choosing a way to finance your new car. Just because one loan may have a low interest rate, that doesn’t mean that it’ll be cheaper than another one. This is because there may be fees or conditions attached that could drive up the price.
Mozo tip
Compare car finance products and see which one will actually cost you less. This can be done by considering things like the comparison rate and a product’s fees. If you need an extra hand, try out the Mozo car loan comparison calculator. View
Trap #2 Repayment flexibility
While a vehicle finance option may seem pretty hot right off the bat, some have limited repayment flexibility.
Say you get paid weekly and sign up for a loan where you can only make monthly repayments – this could make budgeting a little tricky. Or, what if you get a big bonus at work? You decide you’d like to put some towards your loan but can’t as there is no extra repayment feature.
Plenty of personal and car loan providers, for example, offer quite flexible repayment schedules and loan features, while you may not be able to negotiate with the car dealership financier for more favourable terms.
Mozo tip
Get to know the features of your car finance product before signing on the dotted line. Think of potential scenarios (like the ones above) and see if the loan you’re considering would be flexible in those situations. Not only could it save you a headache later down the track, it may also reduce the amount of interest you pay overall.
Trap #3 Balloon payments
A common hiccup car buyers face when paying down their debt is not factoring in a balloon payment at the end of the loan period (if they’ve agreed to one). As discussed above, many dealership finance options require you to make balloon payments, as do some car loans too. A balloon payment is an agreed lump sum that is paid at the end of the loan but accrues interest throughout. By neglecting to factor in this amount into your future budget you could leave yourself financially worse off.
Mozo tip
Avoid balloon payments if you can. While it’s true that it reduces your repayments over the life of the loan, you’ll have to pay it back eventually and it can be a difficult thing to budget for.
Trap #4 Additional costs once you purchase the car
Don’t forget, the cost of the car doesn’t end once you hold the keys. Things like car insurance, registration, petrol, servicing and potential repairs can come with a pretty hefty price tag.
Mozo tip
Make sure to budget in all the additional costs associated with owning a car. Each time you get paid, put money aside to cover what you need because cars can be risky and you never know when you might need to dive into your emergency fund.
We don’t compare dealership finance, but we do compare car loans. Start exploring your options today, or use our car loan comparison calculator to weigh up two loans side-by-side and find out which one is the better offer.
FAQs
Can I finance a car with bad credit?
While a bad credit score can make it harder to get a loan, it is still possible. This is because lenders look at a variety of factors, such as your ability to repay the loan using your current income, when deciding whether or not to lend you money.
There are even lenders out there that specialise in lending to those with bad credit, although you may not find that they offer the most favourable interest rates, terms, or conditions.
If you’re worried about your credit, read our guide on how to improve your credit score.
Can I pay my car loan off early?
Most lenders will let you pay off your car loan early. However, in some cases you may have to pay an ‘early repayment penalty’. While there are dozens of lenders in the Mozo database that don’t charge a fee for paying your loan off before your term expires, the ones that do – specifically if you’ve financed your car through an unsecured personal loan – can charge as much as $395.
Can I refinance a car loan?
Yes. Like with a home loan, you’re able to refinance your car loan to take advantage of lower interest rates and different loan features. Just note, refinancing may incur a break cost or exit fee from your current lender, as well as an application fee for your next car loan.
So, double-check to see if refinancing your car loan will save you money, or if you’ll end up paying more by switching, due to pesky fees.
What documents do I need to finance a car?
When you apply for vehicle finance, you’ll need a few important documents to prove your identity, income, and financial reliability. These often include:
- Identification (your licence, passport, medicare etc)
- Details about the vehicle you intend to buy (make, model, price, registration number)
- Proof of income (payslips)
- Any assets and liabilities you have (such as a home or any loans you are paying back).
* WARNING: The Comparison Rate combines the lender's interest rate, fees and charges into a single rate to show the true cost of a personal loan. The comparison rates displayed are calculated based on a loan of $30,000 for a term of 5 years or a loan of $10,000 for a term of 3 years as indicated, based on monthly principal and interest repayments, on a secured basis for secured loans and an unsecured basis for unsecured loans. This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan.
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