How Does A Car Loan Work?

Buying a new or used vehicle involves a number of decisions, including how you’ll finance the purchase.

A vehicle loan can help spread the cost of purchasing a car over time, but it’s important to understand how the process works before you apply. From choosing between secured and unsecured loans to understanding loan terms, repayments and interest rates, knowing what to expect can help you make a more informed decision.

What is a car loan?

A car loan is a type of finance used to purchase a new or used vehicle. Depending on the lender, vehicle loans may also be available for other eligible vehicles such as motorbikes, caravans, boats and jet skis.

A vehicle loan can be an option if paying the full purchase price upfront isn’t practical and you can comfortably meet the regular loan repayments over the agreed loan term.

What is a secured car loan?

A secured vehicle loan uses an eligible asset—typically the vehicle being purchased—as security for the loan. If the borrower defaults under the loan agreement, the lender may have rights over that asset in accordance with the loan terms and applicable laws.

Rapid Loans offers secured vehicle loans.

What is an unsecured car loan?

On the other hand, unsecured loans don’t require physical assets as security. Because there’s no asset securing the loan, lenders may place greater emphasis on factors such as your income, expenses, employment and credit history when assessing your application. Lending criteria vary between lenders. 

What is the difference between secured and unsecured loans?

The main difference is whether the loan is secured against an asset. With a secured loan, the lender has security over the vehicle until the loan has been repaid in full. This may influence the loan features or interest rate offered, although this varies between lenders.

If you’re considering a secured vehicle loan, the vehicle will generally need to meet the lender’s eligibility requirements, which may include roadworthy standards and comprehensive insurance.

How does car financing work?

The vehicle loan process typically begins with choosing a lender and submitting an application. Some lenders offer conditional pre-approval, while others assess your application after you’ve selected a vehicle.

Throughout the application process, the lender will assess factors such as your income, expenses and overall financial circumstances to determine whether you meet their lending criteria.

Conditional pre-approval

Some lenders offer conditional pre-approval before you’ve chosen a vehicle. If granted, this gives you an indication of how much you may be able to borrow, subject to satisfying any remaining conditions and receiving final approval.

Conditional pre-approval can help you set a realistic budget while shopping for a vehicle. It’s important to remember that conditional pre-approval is not a guarantee that your loan will ultimately be approved, as the lender will still need to assess the vehicle and confirm all lending requirements have been met.

Your car loan contract

Once you’ve selected a vehicle and your application progresses, your lender will prepare your loan contract.

Before signing, take time to read the agreement carefully. Your contract should explain important information including:

• the amount you’re borrowing
• the interest rate
• the loan term
• your repayment schedule
• any applicable fees and charges.

If there’s anything you don’t understand, ask your lender for clarification or consider obtaining independent legal or financial advice before entering into the agreement.

Understanding fixed and variable interest rates

When you take out a vehicle loan, you’ll generally pay interest on the amount you’ve borrowed, in addition to repaying the loan principal.

Fixed interest rates

A fixed interest rate stays the same throughout the agreed loan term. This means your repayments remain predictable, making it easier for many borrowers to budget.

Variable interest rate

A variable interest rate can increase or decrease during the life of the loan. Depending on market conditions and your lender’s terms, this may affect the amount of interest you pay or your repayments.

When comparing vehicle loans, remember that the interest rate is only one part of the overall cost. It’s also worth considering any fees, loan features and repayment flexibility offered by the lender. 

Make sure your vehicle is comprehensively insured

If you’re taking out a secured vehicle loan, your lender will generally require you to maintain comprehensive insurance over the vehicle until the loan has been repaid.

Comprehensive insurance can help cover damage to your own vehicle, as well as damage you cause to other people’s property, depending on your policy. Comprehensive insurance may help cover financial loss if the vehicle is stolen, written off or damaged, depending on the terms of the policy.

This is different from Compulsory Third Party (CTP) insurance, which is a legal requirement for registered vehicles in Australia and provides cover for personal injuries resulting from a motor vehicle accident.

Final approval and settlement

Once you’ve selected your vehicle and provided any outstanding documentation, your lender will complete their final assessment.

If your application is approved, you’ll receive your loan agreement before settlement takes place. Once all requirements have been met, funds are generally released in accordance with the loan agreement and the purchase can proceed.

Can car loans be refinanced?

Some people choose to refinance an existing vehicle loan by replacing it with a new loan. Depending on your circumstances, refinancing may be considered to change lenders, adjust repayment arrangements or consolidate eligible debts.

Before refinancing, consider the total cost of the new loan, including interest, fees, charges and loan features before deciding whether to apply. 

Can I sell a vehicle that has a car loan?

If your vehicle is being used as security for your loan, the lender will generally register a security interest over the vehicle until the loan has been repaid in full.

If you’re thinking about selling the vehicle before your loan is repaid, you’ll usually need to speak with your lender first. In many cases, the outstanding loan balance will need to be paid before the security interest can be removed.

Can I pay my car loan off early?

Some lenders allow borrowers to make additional repayments or pay out their loan early, while others may charge early repayment fees depending on the loan agreement.

Rapid Loans does not charge early repayment fees on its secured vehicle loans, allowing borrowers to make additional repayments or repay their loan early without additional early repayment costs. Before applying for any loan, it’s worth checking whether early repayment fees apply.

Learn more about vehicle loans 

Understanding how vehicle loans work can help you compare loan products, features and costs before deciding whether to apply.

Rapid Loans offers secured vehicle loans from $5,000 to $45,000, subject to our credit eligibility criteria and approval requirements. If you’re considering finance, our team can explain the application process, loan features and repayment options so you know what to expect before you apply.

 

This article is general information only and does not constitute financial or credit advice. It does not take into account your personal objectives, financial situation or needs. When you apply for a loan with Rapid Loans, your application will be assessed against our credit eligibility criteria. All applications are subject to approval. Terms and conditions, fees and charges apply.