A quick guide to common car finance options

Navigating your options when it comes to buying a new car can feel a little daunting. Do you lease, borrow, buy outright or go with dealer finance? 

Here’s a quick guide to some common car finance options to help you decide what’s best for you:

Paying cash

Already got a lump sum saved up, or know you can put away enough in the time frame you need to buy a car? Paying cash for your new wheels could be a good option. 

The beauty of saving to buy a car outright is it’s all yours - no loan repayments for years to come, plus you’ll pay less overall because you won’t be paying any interest on borrowings.

Top tip:

• Don’t leave yourself short when it comes to having enough left over to cover emergencies like car repairs or unexpected expenses.

Secured vs unsecured car loans

With a secured loan you need to provide an asset, like a car or home, as security against your loan. They usually offer a lower interest rate, but it also means if you ever defaulted on your loan in the future, your lender could use your secured asset to recoup unpaid costs.

Unsecured loans don’t require you to secure an asset to your loan but interest rates are generally a bit higher because the lender carries a higher level of risk. You’ll also need to have a good credit history and provide proof of secure employment and enough income to service the loan.

Variable vs fixed rate loans

With a variable rate loan, the interest rate can go up and down over the life of your loan, so your repayment amount can change too. Variable loans come with the flexibility to make additional loan repayments as well as a redraw facility, so you may be able to pay down your loan faster.

A fixed rate loan gives you the certainty of a locked in interest rate and payments that stay the same for your entire loan period. On the other hand, they don’t offer the same flexibility as variable rate loans, so you may be charged a break fee if you choose to pay your loan off before your fixed term period ends.

Top tip:

• Ask yourself are you likely to want to make extra repayments to pay your loan off sooner, or is locking in a low fixed rate a better fit for your financial circumstances.

Novated leasing

This financing option is offered directly through your employer as part of a salary package for terms between 3 and 6 years. It’s an option that offers lower repayments and may also bundle vehicle running costs like insurance, rego and fuel into the lease package.

A novated lease arrangement may increase the value of your salary package but you'll pay less income tax because your tax rate will be calculated on your net salary after leasing costs are deducted.

Top tip:

Be aware that you may need to pay a lump sum, sometimes close to 50% of the original value of the vehicle at the end of your lease contract.

Getting dealer finance

With dealer finance, your car dealership brokers the finance for you. It might seem like a convenient, no fuss option, but dealer finance often comes with higher interest rates, account fees and early repayment penalties. 

Top tip:

Make sure you shop around to negotiate the best deal and crunch the numbers against your other finance options.

Looking for a car loan that won’t hold you back?

Our Car Loans¹ offer competitive rates, no ongoing fees, and flexible repayment options. Plus, you can finance accessories like car navigation systems, insurance and security within your loan amount too. Sound good?

Explore your car loan options here.

This article was originally published in June 2021 and updated in October 2021.

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