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How Does a Car Loan Work in Australia?
January 14, 2021●
5 minute read●
While public transportation in Australia is relatively convenient, there’s no denying the added comfort that comes with owning your vehicle. But not everyone can afford to pay for a car at a single go. Between your bills, mortgages, and other responsibilities, it can be quite stiff. Thankfully, rather than put money away for years, you can take out an auto loan and buy one now. In this article, we’ll take you through the intricate workings of car loans in Australia.
What’s a car loan?
Let’s start with the basics of what defines a car loan in the Land Down Under. A car loan or a vehicle loan is a credit advance individuals buy a used or new vehicle. The borrower formally applies for such an advance, and the lender conducts security checks before approving the loan. When the individual meets the requirements satisfactorily, the moneylender transfers the fund to their account for the purchase. In return for their services, the person pays back the amount borrowed over a previously agreed-upon duration, interest, and so on.
Types of car loans
As an Aussie or non-resident staying in Australia for a while, different auto-loan options are available for you. Not everyone is the same, and various lenders have their requirements for each of the following loans, but the idea remains the same. Sometimes, you’ll find that you’re unfit to qualify for a particular type of advance, either because you’re a student, you have terrible credit, or your income is unstable. In such instances, you should know what other options are available to you:
Loans based on interest: The annual interest rate is a crucial metric when considering a loan. It’s a significant factor in determining how much you have to pay back to cover your advance, and here borrowers have the option of going with a fixed rate or a variable rate. You might observe that most auto-loans use a fixed-rate loan, where the annual percentage rate remains the same irrespective of RBA activities. The Reserve Bank of Australia regulates the official cash rate, and it isn’t static. It continually increases and decreases, and we refer to car loans that fluctuate with current market trends as a variable rate loan.
While a fixed car rate tends to offer more stability because you can estimate your monthly payments more accurately, it means you can take advantage of lower repayments when the cash rate is down. In comparison, with variable loans, you can save some money when the official rate decreases, but you can end up paying higher as well.
Loans based on security: Sometimes, credit checks don’t provide enough guarantees to the lender that you will payback. Many financiers prefer to have a safety net rather than rely on good faith. They require collateral. In the financial world, we refer to such a car loan as a secured car loan, where the individual backs up the loan with significant collateral (often the vehicle itself). If the borrower defaults, lenders can legally repossess the car or other properties attached, sell them, and recover their funds. When financiers do not possess the legal ability to seize your property for failing to make the payments on your advance, we term that an unsecured car loan. Advances without assets attached to them often have a higher borrowing rate because of the lender’s accompanying risk.
Chattel Mortgage: If you need a loan for a vehicle that generates income for your business, you can opt for hire purchase. It’s different from other loans in the sense that the lender acquires the car on your behalf, and after completing the payments, they sign ownership over to you. There are several reasons to consider it a viable option; they’re tax-deductible, you can reclaim any GST you pay on it, and the terms are often favourable. However, because it is an unregulated loan, some lenders might take advantage of the fact they don’t have to disclose all their terms upfront.
Novated leasing: This loan involves a third party, often an employer who acts as a guarantor on behalf of whom the advance belongs. The individual agrees to weekly or monthly deductions from their salary for some time until the loan is fully covered. Only then can they claim full ownership of the vehicle.
How do I apply for one?
Now that you’re familiar with the options available to you, we can move on to how you apply for a vehicle advance.
Figure out who you want to borrow from: Most people get an advance from a financial institution such as a bank or credit union, but there are other options you can explore. For instance, peer-to-peer loans let you borrow from independent investors who offer better terms for shorter advances. You can also get the loan directly from the car dealer, but you may have to pay extra charges for these services.
Compare their rates: It’s essential to know if you’re getting the best deal on the market, so once you decide on which route to take, compare the competition. Don’t use only the interest rate, as it can be misleading. You need to consider ongoing fees, so use the comparison rate. Measure other metrics as well, such as flexibility and availability of extra payments.
Fill out the application: Many lenders now have the option of letting you apply online to get a loan. Whether physical or virtual, it’s good practice to have your documents handy. Prepare your identification papers and documents that attest to your financial situation, like credit history, paychecks, and statements about your assets and liability. The forms often include a section for you to provide details about the vehicle you wish to purchase.
So there you have it, a quick run-through of how vehicle loans operate in Australia. Hopefully, the process is a lot less scary, and you know the first step to take. As a final note of warning, remember to read through the agreement thoroughly before signing. Luckily some lenders provide consulting services, so feel free to take advantage of that.
If you will be using the vehicle for business purposes, you may wish to consider a chattel mortgage. Unsure of the difference? Read our blog consumer car loan vs chattel mortgage. If you have decided on a car that you are considering purchasing, consider getting a car valuation to ensure the condition of the vehicle. To find out how applying for a car loan affects your credit score, read our blog.
Written by Amelia Gomes