What is a car loan?

Interest is the cost of borrowing, quoted as a fixed rate that holds for the term or a variable rate that can move with the market. Most car loans accrue interest monthly or daily on the outstanding balance, so the principal falls as you repay.

Two levers move the numbers most. A shorter term means higher repayments but less total interest, and a longer term does the reverse. A balloon defers part of the principal to the end, which lowers the monthly figure but leaves a large final payment you will need to pay out, refinance, or cover by selling the car.

A secured car loan puts the vehicle up as security and you own it, subject to the lender's registered interest. Under a hire purchase the lender holds title until the final payment. A chattel mortgage gives a business ownership from settlement with a security interest attached, so a GST-registered business can generally claim the GST credit on the purchase rather than on each rental, limited to business use and to the current car limit. Check with your accountant or the ATO.

A finance lease or novated lease leaves the car with the lessor, usually with a residual at the end. A novated lease runs through salary packaging and needs your employer to agree. An unsecured loan has no vehicle security, so amounts are smaller and pricing higher.

Fees can move the real cost a long way: establishment or application charges, monthly or annual account keeping, early exit or discharge costs, late payment charges, and the PPSR registration fee. Stamp duty may apply on the transfer, and lenders commonly require comprehensive insurance.

Dealer add-ons such as extended warranties can be rolled into the finance, which lifts both the amount borrowed and the comparison rate. A larger deposit or trade-in cuts the amount financed. Read the fee schedule in the credit contract, and search the PPSR before buying a used car so you know it is not already encumbered.

Line up quotes on the same basis: comparison rate, fees, term, balloon size, and whether extra repayments or an early payout attract break costs. The comparison rate is a consumer credit disclosure, so a business facility such as a chattel mortgage does not carry one: compare total cost over the term instead. A lender's reputation and complaints history are worth a look as well.

Refinancing can make sense when a materially lower rate is available, your financial position has improved, or you need to restructure repayments. Work out the break-even first: your current payout figure plus any exit costs, plus the new loan's fees, against the interest you would save. Rolling other debts into a car loan may lower the monthly payment while lifting total interest if the term stretches out.