The best ways to finance a car in Australia

What’s the best way to finance a car purchase in Australia? Canstar Odds Manager Joshua Sale shares some options to consider before getting behind the wheel.

Whether you are looking to buy a cheap and reliable used car, need a work vehicle, want to upgrade to a hybrid or electric model, or want to splurge on a luxury brand, the process of buying a car can be difficult as well as fun. Once you’ve decided on the perfect make or model, there is financing for the car to consider, as well as choices such as buying used or new, and from a dealership or privately.

In this article, we’re sharing car finance options, along with some tips on what to think about before signing on the dotted line and picking up the keys to your wheels.

How to finance a car?

The different options for paying or financing a new or used car include:

What should you pay attention to before buying a car?

Apart from buying a home, buying a car is one of the most important purchases many of us will make in our lifetimes. So how do you save money when it’s time to buy a new or used car? While a good general rule of thumb is to avoid relying on debt to buy depreciated assets (such as motor vehicles), the use of finance remains the most common way for Australians to purchase vehicles. . And even if you have some cash on hand, it’s always a good idea to understand your options, as for some there may be exceptions to this general rule.

How long does it take to save money to buy a car?

Paying cash can be a good option to finance a car, depending on your personal financial situation. If you want to buy a car with cash, Canstar’s research suggests it could take an Australian nearly two years to save for a new car that costs $ 25,000. This calculation is based on a person whose average Australian income for a full-time worker is $ 90,329 and pays 20% of their monthly income into a bonus savings account with an average savings rate of 1.06 %. We also assumed that income tax and Medicare Levy were applied to the average annual income and interest income on the savings account, based on the 2021/22 rates.

Is it worth sacrificing a salary for a car?

If you are in the market for a new car, it may be worth sacrificing the paycheck with a novation car rental contract. But keep in mind that if you take out a novation car rental agreement, you don’t actually own the car – you are just renting it.

The “salary sacrifice” of a car involves a three-way deal between you, your employer, and a finance company. Basically, you’re asking your employer if they’re willing to pay off car rent using your pre-tax paycheck, and if the answer is yes, you can take out the leasing from a finance company. This company can be chosen by your employer, who will take responsibility for making rental refunds directly to this company for you, and paying the Employee Benefits Tax (FBT).

ASIC’s Moneysmart says that reimbursements for a vehicle through your pre-tax paycheck can reduce your taxable income, which can reduce the amount of tax you pay each year. The Australian Taxation Office (ATO) states that the GST does not apply to novation leases the same way as it does to other types of car purchases, so you might have a purchase price for the car more low than if you bought it directly.

There can also be downsides to taking out a novation car rental contract. For example, a residual value may be due at the end of a lease, higher interest rates and administrative fees may apply, and you could be responsible for the car if you lose or change jobs.

Taking out a car or a personal loan to buy a car: is it a good idea?

As I mentioned, avoiding debt to buy depreciated assets such as new motor vehicles can be a good idea. But, there can be advantages to taking out a car loan or personal loan to buy a car. Borrowing money for a car can give you immediate access to a vehicle, and you might need it. Regularly paying off a car or personal loan could also improve your credit score. This can be useful when planning a major future purchase, such as buying a home, if you need a home loan. But missed payments or making multiple loan applications in a short period of time could negatively impact your credit score, so keep that risk in mind as well.

Secured loans vs unsecured loans

There is the option of taking out a secured or unsecured loan, with the purchased car often being used as “collateral” for a secured car loan. The interest rate a lender agrees to give you on a car loan or personal loan can vary, and your credit rating can affect both the interest rate and whether or not you approve it. ‘a loan. Whether your loan is secured or unsecured can also affect the interest rate. You can learn more about the interest rate ranges for personal and auto loans, as well as discover the award-winning lenders based on the analysis of Canstar’s research team.

Should you consider dealer financing?

If you want to buy a car through a dealership, having a car loan approval in your pocket when you walk in can come in handy. This can allow you to focus on what you’re there to do: picking a car and getting the best possible price for your purchase.

Dealer financing is a common way to finance a new car, and the convenience factor of using a car dealership as a “one stop shop” clearly has some appeal.

As a car buyer, it is important to be realistic and pragmatic. Car dealers need to make money somewhere, whether it’s financing or the selling price of a car. Often times, dealerships will be able to attract new buyers with high interest rates, but those rates will not necessarily be available for the car you are considering. Also, if you are relying on the dealer for financing, it may limit your ability to negotiate or shop for a better price on your new wheels.

It is also worth beingware of additional fees that can increase the overall cost of a loan. Establishment fees and dealer agency fees may apply with dealer financing and can quickly add up, even into thousands of dollars. Don’t get carried away by the idea that the cost of a loan ends at a low interest rate.

It can sometimes be difficult to figure out all the details of what a “dealership finance” offer entails until you are with a salesperson at a car dealership. Take the time you need to read the fine print and diligently compare all of your auto financing options.

Green loans

Green loans are a type of credit offered on the basis of using the loan for an environmentally friendly purchase, such as green products for your home or the purchase of an electric or hybrid vehicle. Some lenders may offer you a competitive electric vehicle (EV) interest rate with a green loan – in some cases cheaper than what you might get with another car – but it’s still worth reading the fine print. . You might still find a better deal elsewhere. You can compare auto loans from various lenders in Canstar’s database and find out more about hybrid cars available in Australia.

The best way to buy a car for your business

The best way to buy a car for your business can vary depending on your business and your personal circumstances. There may be tax advantages to buying a car for your business, if you need it, using ‘full temporary charge’ (TFE) to purchase a motor vehicle such as a ute, delivery van or most cars, with a deduction capped at $ 60,733 for fiscal year 2021/22, according to the ATO. Canstar has a separate article on Instant Tax Deduction, if you want to know more.

Cover image source: by Taras Vyshnya /

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