Should I get a car loan?

The recommendation by Australian Securities and Investment Commission’s MoneySmart is to make sure you shop around and do your research first. As the saying goes—the more time you spend researching, the better off you will be and will ensure you make the right decision based on your needs. The most popular ways of paying for the cost of purchasing a new car include the following.

Pay cash

If you’re a good saver and have sufficient funds to cover any unexpected emergency that crops up, you might choose to pay cash. A major advantage of paying cash is that you won’t have to worry about any loan repayments for years to come and can continue to concentrate on your savings plan.

Other considerations include whether the vehicle you are buying will be used as part of your work requirements (meaning there may be a taxation write-off opportunity) and whether you have a proven credit history.

A personal loan

Unsecured loan

With this type of loan you do not need to provide security against the finance. This means the interest rates are usually higher because the lender is carrying a higher level of risk.

Generally, these loans are available for between one and seven years and those with a good credit history are generally better positioned to apply for finance of this type.

Secured car loan

A secured loan means you are committing an asset as security for a loan. Commonly, when financing a vehicle, that vehicle is used as the security.

These types of loans often have a lower interest rate than unsecured loans and may be offered on a variable or fixed interest rate.

Novated lease

Novated leasing is an option that offers lower repayments and may also bundle the vehicle registration, insurance, and servicing and fuel costs.

Commonly offered for three to six years, a novated lease is directed through your employer.

This type of financing arrangement may increase your net disposable income (take home pay) as opposed to other kinds of financing arrangements.

Be aware that you will need to pay a lump sum—sometimes close to 50% of the original value of the vehicle—at the completion of the contract.

Dealer finance

It’s the epitome of convenience. On negotiating the right vehicle at the car yard, the dealer then works to secure your finance.

It may seem like a seamless process, but the arrangement may incur higher interest rates, fees and early repayment penalties. If considering this option, it is recommended you shop around to negotiate the best deal.

Add to your mortgage

If you have equity in your home loan you may be able to redraw on your mortgage and add your vehicle purchase into your regular mortgage repayments.

This approach may secure a lower interest rate, however may have a longer term interest cost if you don’t take steps to boost your mortgage payments.

Which option is right for you?

It comes down to your individual circumstances. Investigate the options, including weighing up the benefits and restrictions and calculating the cost with each choice.

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1 All applications for credit are subject to our responsible lending criteria. Fees and charges apply. You can find our Consumer lending terms online or from any of our offices. Redraw is subject to application and registration and is not available when a fixed rate applies to any part of the loan.