How to choose the right car loan

No need to feel overwhelmed when choosing a car loan, just follow our simple guide to find one that's right for you.

If you’ve started searching for a car loan, no doubt you've been faced with words like "redraw", "unsecured", "variable rate" or "chattel mortgage". You could be servicing your loan for some time, so it's important to understand the different options and make the right choice. This guide takes you through how each type of loan works, and how to pick the best one for your needs.

How do car loans work?

Car loans are similar to personal loans in that you borrow a set amount of money and pay it back over time. The difference is that these loans are specifically designed to finance the purchase of a vehicle. Car loans are usually used to finance new cars, although some lenders allow you to purchase a used car if it’s relatively new, which generally means less than five years old.

Types of car loans

There are a few options to consider when looking at car loans, and it’s important to understand the difference between them so you make the right choice.

  • Secured car loan. This option requires you to use your newly-purchased car as a guarantee for the lender in case you default on the loan. These loans usually come with relatively low interest rates, flexible repayment options, and with a choice of fixed or variable rate.
  • Unsecured personal loan. This type of loan can be used to finance a car, or any other purchase, as the way you use the loan amount isn’t restricted. Unsecured loans generally have higher interest rates than secured loans as there is no guarantee required. You can use the money to buy a new or used car.
  • Dealer finance. This is a loan offered by car dealerships. The interest rate may be higher than that offered by a bank or third-party lender, but the ongoing repayments are lower. However, at the end of the loan period, you are required to pay a "balloon payment" which can be from 0% to 60% of the premium.
  • Chattel mortgage. This is a business loan designed for company owners or people who are self-employed. The lender gives you the loan amount and then takes out a "mortgage" on the car. At the end of the loan term and once any residual value is paid for, the vehicle becomes your property. You can also opt for a balloon payment to reduce your ongoing repayments.

How to choose the right car loan

Finding the right loan doesn’t have to be complicated. Follow these steps to ensure you make the best choice for your needs:

Decide how much you can afford

Make sure you don't apply for a loan with excessive fees or rates that will make it difficult for you to meet your repayments. While it may seem a good idea to make large repayments to finalise the loan sooner, you could find yourself struggling financially if these costs are too high. Sit down and work out exactly how much you can comfortably afford to put towards the loan each week or each month.

Understand your budget

Next you need to work out how you are going to budget for the repayments. If you’re self-employed or are paid at irregular intervals, you may prefer a loan that offers flexible repayment options so you can make additional payments to help you reduce the ongoing interest.

Work out what you can access

You may not be able to access all of the loans you are interested in. If you have bad credit or are on a low income, you may not be approved for certain loans. If you fall into this category, look for lenders who will approve loans for people with bad credit. Every loan application you make will be listed on your credit file, and multiple applications within a short space of time may look irresponsible to prospective lenders. Check that you meet a lender’s eligibility criteria before you apply to avoid making unnecessary applications.

How much do you need to borrow?

The amount you need to borrow may also affect the loans you are able to access. Most lenders have a set minimum or maximum amount that they will let you borrow. Make sure the loan you require falls within the lender's allowable limits.

Decide on a fixed or variable rate

Depending on the type of loan you take out you may have a choice between a fixed or variable rate of interest. Fixed rates are set for the life of the loan, so you always know what your repayments will be. Variable rates can change over the course of the loan to respond to market changes. You may be able to take advantage of lower rates, but you could also be subjected to higher rates depending on how the market is behaving.

How flexible do you want your loan to be?

Some car loans are more flexible than others, so think about which conditions would suit you best. For instance, some lenders offer flexible repayment options, which means you can make additional payments and clear your loan early. Other lenders may allow you to use the loan amount to make other purchases if you use the car as security. Make sure you check whether there is an extra charge to take advantage of these benefits.

Do you want any additional features?

Take note of any other features offered by lenders that might you might be of interest. For instance, if there is a redraw facility, you can redraw any additional repayments you’ve made if the need arises.

RACV New Car Loan Offer

RACV New Car Loans


6.49 % p.a.

fixed rate


7.03 % p.a.

comparison rate

  • Low fixed interest rate
  • No ongoing fees
  • Borrow from $15,000
Security Logo

100% confidential application

RACV New Car Loan Offer

Apply for RACV New Car Loan and enjoy a great low fixed interest rate with no ongoing fees.

  • Interest rate from: 6.49% p.a.
  • Comparison rate: 7.03% p.a.
  • Interest rate type: Fixed
  • Application fee: $380
  • Minimum loan amount: $15,000
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Compare a range of car loans

Rates last updated April 25th, 2018
Name Product Interest Rate (p.a.) Comparison Rate (p.a.) Min Loan Amount Loan Term Monthly Service Fee Application Fee Product Description Monthly Repayment
RACV New Car Loans
From 6.49% (fixed)
1 to 7 years
A competitive rate car loan from RACV with no monthly fees and 5-hour loan approval.
Bank Australia Car Loan
6.45% (fixed)
1 to 7 years
A competitive rate and the ability to offset your car’s carbon emissions for the loan term.
Stratton Finance New Car Loan
From 5.49% (fixed)
1 to 10 years
Benefit from a car broker with over 25 years experience
Beyond Bank Low Rate Car Loan
From 5.69% (fixed)
1 to 7 years
Take advantage of a competitive rate, pre-approval and no early repayment fees when you finance a car under two years old.
MyState Secured Personal Loan
From 7.99% (variable)
1 to 10 years
Apply for a loan up to $75,000 and benefit from loan terms up to 10 years. Your choice between secured or unsecured.
From 5.16% (fixed)
1 to 7 years
AutoCarLoans can match you with a lender from its panel with rates starting from 5.16% p.a. Suitable for vehicles up to 2 years old.
Heritage Bank Car Loan
From 8.99% (fixed)
1 to 7 years
Apply for up to $100,000 to finance a new or used car at a competitive fixed rate.
Latitude Personal Loan (Secured)
From 12.99% (fixed)
2 to 7 years
$250 (Loans under $4000 - $140)
Benefit from a tailored fixed rate from 12.99% p.a. to 28.99% p.a. with a loan that can be used for any purpose.
St.George Secured Personal Loan - Fixed Rate
From 8.49% (fixed)
1 to 5 years
Use your car as security and benefit from a competitive interest rate.

Compare up to 4 providers

How to apply

Compare the loan options on this page, or navigate to one of the sites listed on the left and in the table above to view additional products. Once you have selected the offer that best suits your needs, click "go to site" to be directed through to the lender’s website.

Eligibility requirements differ between lenders, so be sure to confirm whether you will be eligible before you apply. Generally, you need to be over the age of 18 and be receiving regular income payments into your bank account. You may also need to have a good credit rating.

Picture: Shutterstock

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Car Loan Offers

Important Information*
Bank Australia Car Loan

A competitive rate and the ability to offset your car’s carbon emissions for the loan term.

Beyond Bank Low Rate Car Loan "Special Offer"

Take advantage of a competitive rate, pre-approval and no early repayment fees when you finance a car under two years old.

RACV New Car Loans

A competitive rate car loan from RACV with no monthly fees and 5-hour loan approval.

NRMA New Car Loan

Purchase a new car with an NRMA Car Loan with a fixed rate term and no monthly fees. Pre-approval available within 5 business hours.

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