burger-menu icon close-icon

How do car loans work?

image for How do car loans work?

It’s safe to say that most people want to buy a car for the convenience and freedom it provides. But cars are expensive, and not everyone has the money to pay for a car upfront in cash.  

Thankfully, there’s a way you can enjoy all the benefits of car ownership without breaking the bank. A good low-interest car loan makes purchasing a car more affordable so you can drive away sooner.  

Car finance is a great option for those who may not have enough savings to buy a car outright but can afford to make loan repayments.  

How does car finance work?

Car loans work like most personal loans, but this is specifically for financing vehicle purchases. You borrow money from a lender, and you must pay it back plus interest within a certain period (called the term). At loans.com.au, a typical car loan term ranges from three to five years. Over this time, you make repayments either every month, fortnight, or week. 

Use a car loan calculator to approximate your car repayments. With this tool, you can figure out the potential cost of your car finance. It can also help you better understand how your repayments work. 

What are the components of a car loan? 

Several components make up a car loan. Aside from the principal loan amount, you also have to think about interest rates, terms, features, and more. When you’re applying for a car loan, be aware of these components to better understand your car finance. 

  • Interest rates 

Think of this as the cost of borrowing money. The interest is the biggest cost of a car loan. When looking for the best deal, keep an eye out on the car loan interest rates as they vary based on the lender. 

At loans.com.au, we offer fixed-rate and variable-rate car loans. A fixed-rate loan means the interest rate will remain the same for the duration of the fixed loan term, while a variable rate can fluctuate during the loan term depending on many factors including funding costs and market conditions.

  • Loan term 

The loan term refers to how long you’ll be paying off your car finance. Some borrowers opt for a longer loan term to lower their repayments, while others choose a shorter loan term to pay less in interest.  

  • Repayments 

Car loan repayments consist of payments towards the principal and interest. The repayment amount is based on the principal loan, interest rate, loan term, payment frequency, deposit, and balloon payment.  

  • Car loan fees 

Aside from the regular repayments, you may also have to pay additional loan fees. These include an upfront or establishment fee, ongoing fees, early payment fee, discharge fee, and late payment fee. 

Is there a way to lessen car finance repayments? 

Yes, there are several ways you can minimise your car loan repayments. Aside from adjusting the frequency of payments and the duration of the loan term, you can try the following: 

Consider putting down a deposit 

Borrowers aren’t usually required to provide a deposit when applying for car finance. However, a car loan deposit could significantly reduce your regular repayments. Car deposits are typically 10% of the value of the car being purchased and are paid at the start of the loan.  

When you put down a car deposit, you’re borrowing less money from the lender. This can help reduce the amount of interest paid and lessen the cost of your car loan overall. 

Choose to add a balloon payment  

A balloon payment is an agreed-upon lump sum that is paid to the lender at the end of the loan term. Borrowers who want smaller, regular repayments can opt for a balloon payment, but over the life of the loan, their total interest costs will be higher. 

Use redraw facilities 

A redraw facility lets borrowers make additional payments to their loan whilst keeping these additional funds available for redraw at no additional cost. Funds in the redraw facility may also reduce the overall interest being charged on the loan. With this loan feature, you can make early repayments to reduce your loan balance. At loans.com.au, this feature is only available for variable car loans.  

What makes a good car loan? 

A car loan with the lowest possible interest rate and little to no fees makes for a generally good car loan. Having additional loan features like redraw facilities and balloon payment options could also be an advantage. When comparing car loans, look beyond the interest rate and see if there are any unreasonable hidden fees. The comparison rates factor in upfront and ongoing fees, and can be a handy tool to use when comparing car loans. Some incidental fees aren’t included in the comparison rate so look out for those, as well. Ultimately, it depends on your needs and whether a loan matches your financial situation.

What are the car finance requirements? 

When applying for a car loan, you’ll need the following: 

  • 100 points of ID: This may include your driver's license, passport, Medicare card, etc.  
  • The details of the vehicle: The make and model, registration number, engine number and purchase price, and whether the vehicle is new or pre-owned.  
  • Proof of income: You may need two or three recent payslips as well as proof of employment, your employer's contact information, and two years' worth of tax returns if you're self-employed.  
  • Assets and liabilities: This may include details of any properties you own, any other loans you may have, your ongoing expenses, and any other debts (such as credit card debts).  

You can apply for a car loan at loans.com.au online! Or talk to our friendly lending specialists by calling 13 10 90. If you have any questions about car loans, don’t hesitate to reach out! We’re more than happy to discuss your car loan needs and help you find the ideal car finance.

About the article

As Australia's leading online lender, loans.com.au has been helping people into their dream homes and cars for more than 10 years. Our content is written and reviewed by experienced financial experts. The information we provide is general in nature and does not take into account your personal objectives or needs. If you'd like to chat to one of our lending specialists about a home or car loan, contact us on Live Chat or by calling 13 10 90.

Welcome to loans.com.au _

Just in case we lose you, may I ask for your contact details....

Loading Form