Car Loans

How Do Car Loans Work?

If you’re looking to buy a car, chances are, you’ve heard of a car loan. CANSTAR breaks down just exactly what car loans are, and how they work.

What is a car loan?

A car loan is a loan taken out for the purpose of buying a motor vehicle such as a Ute, car, 4WD, motorbike or other road vehicles. A car loan can also be known as a vehicle loan. If you don’t have enough in savings to afford to buy a car but you can afford to repay a loan in monthly installments, you might consider taking out a car loan to finance your new wheels.

There are two main types of car loans:

  1. New car loans
  2. Used car loans

How do car loans work?

Car loans may be offered by financial institutions as a standalone car loan, or personal loan, or via the redraw facility or line of credit on a home loan. You can also get a car loan from peer-to-peer (P2P) lenders and car dealers. Where you choose to go could have a big effect on the interest rate you pay on your car loan.

John found it pays to shop around

Canstar-star-rating-and-awards-Comparing-costs iconJohn went into a car dealership to look at a red sports car. He went for a test drive and decided he just had to have the car. He got all the optional extras and then the car salesman arranged a loan for him. Richie drove away from the dealership with a loan for over $45,000 and an interest rate of 22% per year. When he got home he spoke to his dad and realized he had paid way too much for the car and the car loan was very uncompetitive.

When you enter a contract for a car loan it will typically be for a period of one to five years. This is the amount of time over which you agree to repay the loan, generally by monthly installments. In addition to the amount you borrow, interest will also be charged on the balance owing. You can try our car loan calculator to see approximately how much your car might cost you over the term of your loan.