What is a car loan and how does it work?

If you’ve made the decision to upgrade your current vehicle, your very first step, even before researching cars, should be all about financing. Nowadays, though, there are quite a few different options out there when it comes to car loans.

So, in a similar vein to the ‘Who is your daddy and what does he do?’ game from Kindergarten Cop (IT’S NOT A TOOMAH!), we thought we’d put together a ‘What is a car loan and how does it work?’ article that lists the different types of car loans that are available to you, and explains how each of them work. This will enable you to make a much more educated choice and hopefully save you some money and headaches on the way, too.

Each type of car loan explained

Secured loan

When a loan is ‘secured’, this simply means that the lender has some sort of security or ‘lien’ against the money you borrow from them. In the case of a car loan, of course, your car is the security. What this means is that if for whatever reason you’re not able to make repayments, the lender has the power to sell your car in order to make the money back that’s still owing.

The upside to this, however, is that because the lender has this security they see the loan as lower risk and as such will generally offer a lower interest rate than they would with, say, a personal/unsecured loan.

Personal (unsecured) loan

You might have already guessed it, but a personal or ‘unsecured’ loan is essentially the opposite of a secured loan. That is, the lender doesn’t have the ability to repo your car and sell it should you find yourself unable to make repayments.

As a result, you’ll find that the interest rates are higher than a secured loan because lenders will see this type of loan as higher risk.

Novated lease

If your employer offers salary packaging, you’ll more than likely be able to take advantage of a novated lease. This involves entering into a financial agreement with both your employer and a finance company, whereby your employer’s payroll department will make your lease repayments directly to the lender - from your pre-tax salary.

This is beneficial as it reduces your overall gross (taxable) income, which means you’ll pay less tax when the end of the financial year rolls around.

What your monthly repayment amount looks like will depend on a few things including how much you choose to defer to the residual/balloon payment (a lump sum payment at the end of the lease term) as well as inclusions like rego, insurance and servicing, the length of the lease and the interest rate. 

Finance lease

Available to both individuals and businesses, the way a finance lease works is that a lender makes the purchase of the vehicle and leases (essentially rents) it to you over the length of the lease. Once the lease term is up, you then have the option to pay a residual/balloon payment and keep the car, begin a new lease and pay off the remaining balance or sell the vehicle and use the money to pay off the lender.

For businesses entering into a financial lease for a work-related vehicle, you’ll be happy to know that your repayments are tax deductible too.

Operating lease

Not unlike a finance lease, an operating lease works basically as a rental agreement for your new vehicle between your business and the lender. Where it does differ from finance leasing, though, is that your business is unable to buy the vehicle throughout the lease. Although, you are able to claim the lease repayments as a tax deduction for your business.

In many instances, operating lease packages can also include operational costs of the vehicle such as rego, insurance, repairs and fuel.

Chattel mortgage

Pretty much identical to a secured loan except for businesses, a chattel mortgage works by the lender providing you however much money you need to buy the vehicle. And while you’ll be taking ownership of the car from the get-go, the lender holds a ‘mortgage’ over it and has the power to repo and sell it if you can’t make your agreed-upon repayments.

When the loan term is up, the vehicle’s 100% yours.

We’ll help you find whichever type of car loan you’re after

At Stratton Finance, we’ve had over twenty years experience working with people just like you all over the country to find the right type of car loan - and with a phenomenal interest rate to boot.

So whether you’re after a secured or personal (unsecured) car loan, finance or novated lease or chattel mortgage, we’ve got the knowledge and expertise to deliver the best financing deals to suit your needs perfectly. Use our online car finance quote tool to find out what your monthly repayments could be, and apply online in under 5 minutes!

If you’re still uncertain which car loan type would be best for you or if you have any other questions, please feel free to call us now on 1300 787 288 or send us an online enquiry and we’ll make sure to respond ASAP.

Oh, and by the way, our industry partners at carconnect can help you skip all the BS of buying your new car (e.g. negotiating, arranging delivery, etc.). Simply search for the car you want, pop in some of your details and they’ll put the tender out to their huge country-wide dealer network to find you the hottest price. They’ll even sort out the sale of your old car, too!