Types of car loan

For a lot of Aussies, cars are a necessary part of everyday life that let you get to work, the shops or weekend destinations conveniently. But cars can also be expensive and sometimes shelling out a large lump of cash up front isn’t a viable option. That’s where car loans come into play. A car loan can help you get the finance you need, for the car you want.

If you’re in the market for a a car loan the first decision to make is what kind of car loan to go for, which includes working out what kind of lender you want to borrow from, whether a fixed or variable interest rate is right for you and whether or not you want it to be a secured loan. To guide you through the decision process we’ve outlined some different types of car loan for you to consider before getting on the road.

What's the difference between car loans and personal loans?

Before we jump into the explaining the various types of car loans, you might be wondering just what the difference is between a car loan and a personal loan. For the most part they’re pretty much the same thing, a car loan is just a type of personal loan that’s specifically designed for buying a vehicle.

Secured vs unsecured

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

Generally, a secured loan is a type of loan where you use collateral as security against the loan, to minimise the risk to the lender in case you default. Collateral can be things such as a house, a business or a car. When it comes to secured car loans, the most common form of security is the car you’re buying with the loan. So why put your new car up as collateral? Well, for the most part secured loans will get you a better interest rate and so can save you money.

Unsecured car loan

The other side of the coin is an unsecured loan. In this case, you don’t put up an asset as security, but these loans usually have a slightly higher interest rate on the whole. Unsecured car loans are less common than secured options, because the car you’re buying is the perfect asset to use as collateral.

Fixed vs variable

On top of deciding whether to get a secured loan or an unsecured loan, you’ll need to decide on the type of interest rate, either variable or fixed. This can also affect how much interest you pay, as well as make a difference to the way you budget for your monthly repayments.

Fixed rate car loans

Having a fixed rate loan means that throughout the loan, your rate will stay the same. The main advantage of this is that your repayments will be consistent throughout your loan making it easier to budget. A fixed rate can also be taken advantage of when the interest rate on offer is really good and you want to lock it in for the life of your loan.

Variable rate car loans

In contrast to a fixed rate, a variable interest rate may move up and down throughout the loan to align with the market. This flexibility can be a double-edged sword - you may find the interest rate goes up, or it may go down. Variable rates are often lower than fixed rates and can be a better option if you aren’t overly concerned about the possibility of changing repayment amounts.

Bank vs peer-to-peer

There’s tonnes of lenders out there from big banks, to independent financial institutes, to peer-to-peer lenders. They all have their own rates, features and eligibility criteria so figuring out which one is right for you can take some time. While we can’t go through every single individual lender right here, we’ve broken down  the difference between a traditional bank loan and borrowing from a peer to peer lender.

Bank car loans

Banks may be the first place you look when it comes to getting a car loan. One of the advantages of taking out a car loan with a bank is that you can borrow from the same place you have your bank account, home loan and credit card, which can be easier to keep track of. Plus, you may even snag a better deal or discounts for bundling products. On the other hand, banks often offer higher interest rates and their lending criteria can be less flexible than other challenger lenders.

Peer-to-peer car loans

Peer-to-peer lenders work by giving you access to an online marketplace, where your loan is funded by individual investors.

A peer-to-peer car loan often comes with a personalised interest rate, so if you’ve got great credit, you could wind up with a lower rate. The downside is that peer-to-peer loans are generally online only, so you’ll need to be comfortable managing your loan from your laptop.

New car loan vs used car loan

Whether you are intending on get a fresh new ride straight from the factory, or a car that’s been around the block, your choice may effective what type loan you want to get. Sometimes you can get the same loan for either a used car or a new car, but you’ll likely find that getting a loan for the specific type will be best.

New car loan

It’s not uncommon for new car loans to come with a couple benefits over their used car counterparts. The first is that they usually have lower interest rates. On top of this, you may find that some lenders have special rates on certain new cars or even bonus cash, which can be a lump of cash upon getting the loan.

Used car loan

While a used car loan may not always have the same monetary incentives as a new car loan, there a bunch of great options that have low fees and good rates. You may also find you have better flexibility in repayment periods with a used car loan.

Choosing the right type of car loan for you

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

And 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 loans guides.


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