Car finance can be a valuable tool for getting behind the wheel of your dream car without needing to pay the full cost upfront. Like any financing option, car loans come with costs such as interest, fees, and other charges. While these expenses are part of the process, there are smart ways to manage them and save money along the way. This guide explores key strategies to help you get the best value out of car finance. You’ll find practical tips on choosing the right loan, managing repayments, reducing interest costs, and making the most of your budget.
Car finance can feel overwhelming, with so many rates, terms, and conditions to navigate. It’s even trickier if you’re short on time and don’t want to dig through all the fine print yourself. A Finance Broker, with their in-depth market knowledge and attention to detail, can provide advice tailored to your personal financial needs. They compare a wide range of loan options, spot hidden fees, and negotiate better deals, potentially saving you both time and money.
By understanding your unique financial situation, a broker can help you find car finance that fits your lifestyle and long-term goals. Want to make the process easy? Talk to one of our Emu Money Brokers. They can compare over 100+ products from more than 50 lenders in just a few minutes. Simply fill out the ‘Get Started’ form, and we’ll be in touch soon!
There are several types of car finance in Australia that can benefit you in different ways. Whether you want to own the car outright, lease or rent it, you have many choices to consider. Each of these loan types has its unique features, advantages, and potential disadvantages. Selecting the wrong product may result in higher costs or hidden fees, so it's essential to understand the nuances of each option to choose the most suitable one.
Here are the most common types of car finance:
A secured car loan is a type of personal loan that uses the car as collateral. The lender provides funds to purchase the car, and the borrower makes regular payments. The car serves as security for the loan, and the borrower retains ownership. Once the loan is paid off, any mortgage over the car is removed.
| Amount | $15,000 - $250,000 |
| Term | 2 - 7 years |
| Rate | From 6.29% |
| Eligibility | Current driver's license, proof of income, proof of address, and proof of identity. |
| Time to Funding | 1 - 3 days |
Pros:
Immediate ownership of vehicle.
Best rates for car loans.
Cons:
Limited approval rates for older cars.
Rates can be higher for bad credit.
Best for:
Ideal for those who want to own the car outright.
An unsecured car loan is a type of personal loan that does not require the car to be used as collateral. The lender provides funds to purchase the car, and the borrower makes regular payments. Unlike secured loans, unsecured loans do not require the borrower to provide any form of security, such as a vehicle or property, as collateral.
| Amount | $15,000 - $100,000 |
| Term | 2 - 7 years |
| Rate | From 6.99% |
| Eligibility | Current driver's license, proof of income, proof of address, and proof of identity. |
| Time to Funding | 1 - 3 days |
Pros:
No need for collateral.
Can be used for a wider range of cars.
Cons:
Higher rates for car loans.
Balloon payments are not available.
Best for:
Ideal for those who want to purchase an older or highly modified car.
An ABN car loan is a type of business loan that requires a business to borrow money to purchase the vehicle and make regular repayments. The vehicle must be used for business purposes. This is a popular option for self-employed individuals who want to own the car outright.
| Amount | $15,000 - $250,000 |
| Term | 2 - 7 years |
| Rate | From 6.29% |
| Eligibility | ABN, 3+ months in business, $5,000+ monthly turnover, GST registered |
| Time to Funding | 1 - 3 days |
Pros:
Great for self-employed individuals.
Ownership from start; asset for the business.
Cons:
Requires upfront capital; potential strain on cash flow.
Depreciation risk; vehicle value may decrease over time.
Best for:
Ideal for ABN holders seeking ownership, including older or unique vehicles.
This is a three-way agreement between an employee, their employer, and a finance company. The employee leases the car, and the employer makes lease payments on behalf of the employee, deducting the amount from the employee's pre-tax salary. This can offer tax benefits to both the employee and the employer.
| Amount | $15,000 - $150,000 |
| Term | 2 - 7 years |
| Rate | From 6.29% |
| Eligibility | Current driver's license, proof of income, proof of address, and proof of identity. |
| Time to Funding | 1 - 3 days |
Pros:
Tax-efficient; reduces taxable income through salary packaging.
Includes vehicle running costs in lease payments.
Cons:
Tied to employment; changes if job changes.
Potentially complex; involves three-party agreement.
Best for:
Suitable for employees seeking tax-effective car financing through their employer.
When calculating your repayments, you should carefully evaluate the suitability of a balloon payment, a large final payment due at the end of the loan term. The allure of a balloon payment lies in its ability to reduce monthly repayment amounts, making it an attractive option for those who want to manage their short-term cash flow more effectively. By deferring a significant portion of the loan to the end of the term, you can free up capital for immediate operational needs or investments. This can be particularly beneficial for individuals who anticipate higher revenue in the future or those who prefer to allocate funds to other growth-driving activities in the short term.
However, opting for a balloon payment also entails certain risks and considerations. The most notable is the large sum that becomes due at the end of the loan period, which requires careful financial planning and budgeting. You must ensure you have a strategy in place to manage this lump sum payment, whether it's through future cash reserves, refinancing options, or the sale of the vehicle. Additionally, a balloon payment structure may lead to paying more in total interest over the life of the loan compared to a traditional loan without a balloon payment. Therefore, it's important to weigh the immediate cash flow benefits against the long-term financial implications and ensure that the decision aligns with your overall financial strategy and capabilities.
Here's an example of the difference in repayments on car finance, with and without a balloon (residual) payment. Although a balloon payment could make the car more affordable in the short term, you would pay an additional $1,832 in interest.
| with Balloon | without Balloon | |
|---|---|---|
Purchase price | $50,000 | $50,000 |
Loan term | 5 | 5 |
Interest rate | 7.99% | 7.99% |
Repayment frequency | Monthly | Monthly |
Balloon (Residual payment) | 20% | 0% |
Monthly repayments | $877 | $1,014 |
Total repayments | $52,647 | $60,815 |
Remaining debt | $10,000 | $- |
Total interest paid | $12,647 | $10,815 |
Another great way to reduce your borrowing costs is to consider paying a deposit. A substantial upfront payment can significantly reduce the borrowed amount, leading to lower monthly repayments and potentially less interest paid over the life of the loan. This immediate equity in the vehicle also reduces the lender's risk, which might result in more favourable loan terms or interest rates. Additionally, a deposit can offset the rapid depreciation that new vehicles typically experience, helping to avoid a scenario where the car is worth less than the outstanding loan balance (negative equity). For individuals with available capital, paying a deposit is a strategic move that can enhance financial flexibility, reduce long-term debt obligations, and align the financing more closely with the individual's overall fiscal management and budgeting strategies.
Here's an example of the difference in repayments on car finance, with and without a deposit. Using a deposit could save you $2,163 in interest, over the lifetime of the loan.
| with Deposit | without Deposit | |
|---|---|---|
Purchase price | $50,000 | $50,000 |
Loan term | 5 | 5 |
Interest rate | 7.99% | 7.99% |
Repayment frequency | Monthly | Monthly |
Deposit | 20% | 0% |
Monthly repayments | $811 | $1,014 |
Total repayments | $48,652 | $60,815 |
Total interest paid | $12,647 | $10,815 |
A strong credit score is a pivotal factor in the car finance application process, acting as a testament to your financial responsibility and creditworthiness. Lenders heavily rely on this score to assess the risk involved in lending to you. A higher credit score not only increases your chances of loan approval but also positions you to secure more favourable loan terms, such as lower interest rates and better repayment schedules. Essentially, a good credit score reflects a history of timely payments and responsible credit management, which reassures lenders that the risk of default is minimal. In contrast, a lower score can result from late payments, high credit utilisation, or a lack of credit history, making lenders wary and potentially leading to higher interest rates or outright loan denial.
Improving your credit score before applying for car finance can be a good move, especially if you are planning ahead. Start by regularly reviewing your credit reports to ensure accuracy and promptly address any errors or discrepancies. Consistently paying your bills on time is crucial, as payment history is a significant component of your credit score. If possible, reduce your credit utilisation ratio, which is the amount of credit you're using compared to your available credit limit. Building a strong credit history takes time, so it's advisable to start these practices well in advance of applying for a loan. By proactively managing your credit score, you enhance your financial profile, paving the way for more favourable loan terms and a smoother financing process.
Managing your personal finances effectively is an important factor that lenders consider when reviewing your car finance application. Lenders assess your financial health by looking at your income and expenses to ensure you can manage loan repayments sustainably. A stable or growing income is often seen as a sign of strong financial management, giving lenders confidence in your ability to meet repayment obligations. However, if your financial history shows irregular income, gaps, or a downward trend, it might raise concerns about your ability to repay the loan. Showing a consistent and stable financial track record can help you not only secure a loan but also negotiate better terms.
To maintain financial stability, it’s essential to plan and monitor your income and expenses regularly. Take time to review your spending patterns, identify areas for improvement, and set aside savings for unexpected expenses. Simple strategies like creating a monthly budget, cutting unnecessary costs, and building an emergency fund can make a big difference in keeping your finances on track. Before applying for car finance, consider preparing a clear picture of your financial situation, including a budget or savings plan. Showing lenders that you’re financially responsible can improve your chances of approval and help you secure more favourable loan terms.
One key factor to consider when trying to minimise costs is the loan term. Typically, a shorter loan term means higher repayment instalments but less interest paid over the life of the loan. For individuals with consistent cash flow that can handle larger repayments, opting for a shorter term can lead to significant savings in interest costs. Conversely, a longer loan term often results in smaller, more manageable repayment instalments, which might be preferable for individuals wanting to maintain liquidity. However, it's essential to note that, over time, the total interest accrued on a longer-term loan can be considerably higher. Thus, while longer terms provide immediate relief in terms of cash flow, they might lead to higher overall costs in the long run.
Here's an example of how you could save $8,624 by picking a 12 month term over a 60 month term, on a $50,000 loan with a 7.99% interest rate:
| Term | Repayment Amount | Total Amount to Repay |
|---|---|---|
12 months | $4,349 | $52,190 |
24 months | $2,261 | $54,267 |
36 months | $1,566 | $56,397 |
48 months | $1,220 | $58,579 |
60 months | $1,013 | $60,814 |
Choosing the right payment frequency for your car finance repayments — be it weekly, fortnightly, or monthly — can impact the total amount repaid over the loan's term. Opting for more frequent repayments, such as weekly or fortnightly, can lead to interest savings, as the principal amount reduces faster, thereby decreasing the interest accrued over time. This strategy can be particularly effective for individuals with consistent cash flow, allowing them to manage repayments efficiently without straining their financial resources. However, it's crucial for individuals to balance these potential savings with their cash flow realities. Frequent repayments might not be feasible for individuals with irregular income streams or those that operate seasonally. In such cases, less frequent repayment options, like monthly payments, might align better with their cash flow patterns, ensuring that loan obligations do not disrupt their operational stability. Therefore, while altering payment frequency can be a smart move to reduce overall costs, it should be carefully considered in the context of the individual's financial rhythm and capacity to sustain regular payments.
It's important to be vigilant about the various fees that can accompany the principal and interest rates, as these can significantly affect the overall cost of the loan. Monthly service fees, for instance, can add a considerable amount over the loan's lifespan. Direct debit fees, charged for processing each payment, may seem small individually but can accumulate to a substantial sum, especially with more frequent repayments. Additionally, early termination fees are particularly important to consider if you plan to pay off the loan ahead of schedule; these fees can negate some of the interest savings gained from early repayment. Not all lenders charge these fees always, so it's essential to thoroughly review and understand all the associated fees, not just the interest rate, when comparing loan options. This comprehensive approach ensures you have a clear picture of the total cost of the loan, enabling you to make a more informed financial decision that aligns with your needs and capabilities.
Considering refinancing your existing car finance can be a solid move to capitalise on better loan terms and rates available in the market. Your personal finances may have changed since you last applied for a loan, so you may now be able to get a better deal. Refinancing involves replacing your current loan with a new one, typically with more favourable conditions, such as a lower interest rate, different loan term, or more suitable repayment structure. This can lead to significant cost savings over time, reduce monthly payments, or align the loan more closely with your personal financial situation. However, it's not just about finding a lower interest rate; refinancing can also offer the flexibility to adjust the loan structure to better suit your current personal needs, such as extending the loan term to lower payments or consolidating multiple debts for easier management.
The decision to refinance should be approached with caution and thorough analysis. One critical factor to consider is the potential cost of early termination fees associated with your existing loan. These fees can sometimes be substantial, and it's essential to calculate whether the savings from refinancing outweigh these costs. Additionally, the refinancing process itself might involve application fees, legal costs, and other charges, which need to be factored into your decision. Seeking professional financial advice can be invaluable in this process. An Emu Money Broker can help you navigate the complexities of refinancing, compare different loan products, and calculate the overall financial impact, ensuring that you make an informed decision. They can also assist in understanding the fine print and long-term implications of the new loan agreement, ensuring that your decision to refinance is aligned with both your immediate financial goals and long-term personal strategy.
