Buying a used car with finance: pre-approval and the fine print
This guide is general information to help you understand car loans. It isn't credit advice, and it doesn't take your circumstances into account.
It's easy to spend longer choosing the car than choosing the loan, yet over its life a loan can cost thousands in interest and fees. A little homework before you shop puts you in control of both.
Start with a budget, not a car
Work out what you can comfortably repay each week or month, then add what owning the car costs: insurance, rego renewals, fuel, servicing and tyres. If the price you're looking at excludes government charges, add those too; our guide to drive-away and excl. government charges explains them. Moneysmart has a free loan calculator that shows how the rate and the term change your repayments.
Pre-approval: what it is and isn't
Many lenders will give you approval in principle, often called pre-approval, before you choose a car. You know how much you can spend, and you shop with a firm budget instead of making the finance decision on the spot.
Pre-approval isn't a loan. It's usually conditional: the lender still has to verify your details and approve the car itself, and the approval expires after a set time. Ask your lender:
- How long does the pre-approval last?
- What does it depend on, such as the car's age, the price or the type of seller?
- What will you need from me, and from the seller, to finalise the loan?
One more thing: each application for credit is noted on your credit report, and too many in a short time can lower your credit score. Choose a lender before you apply rather than applying everywhere at once.
Secured and unsecured loans
A secured car loan uses the car as security. The lender registers its interest on the PPSR and can repossess the car if the loan isn't repaid. Because the lender carries less risk, secured loans often have lower interest rates than unsecured personal loans, but the lender may set conditions on the car, such as its age, and may require it to be comprehensively insured.
Reading the fine print
Before you sign, find these in the loan documents:
- Interest rate and comparison rate. The comparison rate combines the interest rate with most fees and charges in one figure, which makes loans easier to compare. It's calculated on an example loan amount and term, so your actual cost can differ; read the warning that comes with it.
- Fees. Establishment or application fees, monthly account fees, late payment fees, and any fee for paying the loan off early. Moneysmart notes that fixed-rate loans may charge a fee if you repay early.
- Balloon or residual payment. A lump sum due at the end of the loan. It lowers the regular repayments but generally raises the total cost, so be sure you'll be able to pay it when it falls due.
- The term. A longer loan means smaller repayments but more interest overall.
- The total amount you'll repay. Compare this across loans, not just the repayment.
- Add-on insurance. If you're offered insurance with the loan, ask what each policy covers, what it costs and whether it's optional.
- Who's involved. Moneysmart points out that finance arranged at a dealership can mean paying fees to more than one party, such as a broker as well as the lender. Ask who is involved and what each one charges.
Know who you're dealing with, and where to get help
- Credit providers and brokers generally need an Australian credit licence, or must be authorised by a licensee. You can look up a licence on ASIC's Professional Registers search.
- If you have a complaint about a loan that the lender doesn't resolve, the Australian Financial Complaints Authority (AFCA) is a free external dispute resolution service.
- If repayments become hard, talk to your lender early. Free, confidential financial counselling is available through the National Debt Helpline.
Paying for one of our cars
Finance is available: ask us about paying for a car when you enquire. If you already have pre-approval from your bank or lender, tell us when you get in touch. Once you've chosen a car, we can give your lender the details it needs, such as the car's VIN and price. A finance enquiry through our website is an enquiry, not a credit application. Send us a message to ask about finance.
General information only, not credit advice. Consider your own situation, and read the lender's documents, including the comparison rate warning and any credit guide, before you sign.