The complete guide to vehicle finance

By Polly Fleeting ·

What’s in this guide:

  • What vehicle finance is and how it works  
  • Options for car finance: car loan, personal loan, dealer finance, mortgage redraw, credit card, car lease 
  • Tips and traps for financing your car  

What is vehicle finance? 

Vehicle finance, or car finance, refers to money you borrow in order to purchase a car. Whether you choose to take out a car loan from a bank or from the car dealership, you’ll have to pay what was lent to you over a certain period of time with the addition of interest. 

How does car finance work?

Depending on what type of car finance you choose, there will be a different step by step process of how it all works. 

The basic principles remain the same, you borrow money and you pay it back with accrued interest.

There are a few things to consider when choosing the best car finance for your situation. These include: 

  • Interest rate: The percentage you are charged on your owing balance. 
  • Loan period: The amount of time you have to pay down your debt.  
  • Repayment amount and flexibility: The cost of your regular repayments and how flexible your options are (e.g. can you make extra repayments?).  
  • Fees and charges: This could be annual fees, monthly fees, early repayments penalties, late payment charges etc. 
  • The lender: Do you prefer a more traditional option like a major bank, or would you prefer an online loan from a smaller lender?  

It’s also important to consider the price of the car you intend to buy and whether or not it is realistic that you are able to pay it down within your budget. So, make sure you compare the features of similar car finance products on the market to find the one that suits you. 

Types of car finance in Australia

There are a range of options when it comes to car finance in Australia. And we are here to help with a full comparison of what’s on offer to fund your next vehicle.

Car loan

A car loan is a type of loan offered by banks and lenders that is designed specifically for the purchase of a vehicle. It can be used for either new or used cars and comes with both fixed and variable rates. This form of vehicle finance can be a great option as there are a tonne of features like extra repayments, redraw facilities and flexible repayment schedules. Just remember, a car loan is a type of secured personal loan so the car you buy is put up as collateral if you default on your loan. 

Dealer finance

Dealer finance is another type of car loan that is offered to you at the car dealership. Ultimately, it is a faster way to be approved for lending as you can receive funding and buy the car on the spot. This option generally comes with lower interest rates (1% or less) but also the addition of a balloon payment - a lump sum you pay at the end of the loan term. Plus, dealer finance is usually only available for new cars. 

Personal loan 

If you can’t get a secured car loan, an unsecured personal loan may be another bank finance option for you. While these loans come with higher interest rates, you don’t have to put any asset against the loan. Like car loans, unsecured personal loans also have the same features that can help borrowers pay down their debt faster and on a schedule that suits them. 

Other non-loan options: 

  • Mortgage redraw: If you have made extra repayments on your home loan and have the ability to redraw them, this may be an option to pay for your car outright. 
  • Credit Card: 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 lease: 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.

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 

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

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.

Tips and traps when financing a car

There are plenty of things to be mindful of when choosing vehicle finance. Here are some common traps that Aussie car buyers fall into and Mozo's tips to avoid them: 

Trap #1 Interest rates and fees 

When it comes to vehicle finance, it pays to shop around. Avoid signing up for the first loan you see simply because there’s a low rate attached to it. There may be fees or conditions that could make the loan more expensive than it first seems. Or conversely, it may have low fees but a high interest rate. 

  • 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 any additional fees. If you need an extra hand, try out the Mozo car loan comparison calculator

Trap #2 Repayment frequency 

While a vehicle finance option may seem pretty hot straight of the cuff, some have limited repayment options. Say you get paid weekly and sign up for a loan where you can only make monthly repayments - this may be tricky to budget. 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. Bummer. 

  • Mozo tip: Get to know the features on your car finance product before signing 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. For an indication of how much your repayments could be on a car loan without a balloon payment, jump over to our car loan repayments calculator.  

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. 

FINAL NOTE: Don’t forget you’ll need a few things when applying for vehicle finance. This could 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) 

RELATED GUIDE: Buying a car: A guide to getting your first set of wheels 

Want to start exploring your car loan options today? Check out some products below or head over to our car loans comparison table for more.

Compare Car Loans - last updated November 28, 2020

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Polly Fleeting
Money writer

Polly Fleeting is a personal finance writer here at Mozo, specialising in loans and credit cards. Her work is aimed at helping people find ways to make smart product choices, reduce debt and get more for their hard-earned dollars. Polly has a degree in Journalism from the University of Technology, Sydney.