Types of car loan

Cars are expensive, and paying a large sum upfront isn't always possible. Car loans provide the finance you need for your desired vehicle.

Before choosing a car loan, you'll need to consider the type of lender, interest rate structure, and security options. Here's what you need to know about different car loans before hitting the road.

Deciding between a secured or unsecured car loan can affect how much interest you pay to get your hands on your new set of wheels.

• Secured car loan: A secured loan uses collateral which, in this case, is usually the car you're buying. Lenders offer secured loans to protect themselves if you default, meaning that these loans can usually have lower interest rates as a result.
• Unsecured car loan: Unsecured loans don't require collateral but generally have higher interest rates. These can be less typical for car purchases since the vehicle itself can easily serve as security.

One other aspect of car loans you’ll need to think about is whether you’ll pay a variable or fixed rate. This can also affect how much interest you pay, as well as make a difference in the way you budget for your monthly repayments.

• Fixed rate car loans: Fixed rates remain constant throughout the loan term, providing consistent repayments for easier budgeting. Fixed is ideal when rates are low and you want to lock them in, but they’ll often have higher rates than variables.
• Variable rate car loans: Variable rates fluctuate with the market. While often starting lower than fixed rates, they can move up or down over time with the official cash rate. They suit borrowers comfortable with changing repayment amounts.

Car loans are available from various sources, including major banks, independent financial institutions, and peer-to-peer lenders. They all have their own rates, features and eligibility criteria so figuring out which one is right for the situation can take some time. 

• Bank car loans: Traditional banks offer convenience, especially if you already bank with them. You might access package discounts by bundling services, though rates tend to be higher and criteria stricter.
• Peer-to-peer car loans: These online marketplaces connect you with individual investors. They often offer personalised rates based on your credit score but require comfort with digital-only services.

Lenders often specialise in car loans based on whether you're buying a new or used car. Sometimes you can get the same loan for either option, but you’ll often find that getting a loan for the specific type will be best.

• New car loans: New car loans usually offer lower interest rates and sometimes include special rates or cash bonuses for specific models.
• Used car loans: While lacking new car incentives, used car loans often provide flexible repayment periods and competitive rates.

It can be tempting to compare loan types solely based on interest rates, but there are several other features to be aware of that can affect your repayments.  

Loan length

Most car loans range from one to seven years. Longer terms mean lower monthly payments but more interest over time. Shorter terms have higher payments but cost less overall.

Early repayment options

Some loans offer the flexibility to make extra payments or pay off the loan early. Check if there are any fees or penalties for early repayment as this can make a big difference.

Fees

You should also keep in mind that loans often come with fees. These can be establishment fees, monthly service fees, and late payment charges. These can significantly impact the total cost of your loan so make sure to keep these in mind.

So which type of car loan is right to get you on the road? There’s no ‘best’ car loan, and every type has advantages and disadvantages. It’s up to you to work out what suits your budget and needs.

Once you’ve worked out what type of car loan you’re looking for, you can jump straight in and compare car loans, or you can keep learning and read some of our car loan guides.