How Does A Car Loan Work?

Buying a new car should be stress free and exciting, but with how competitive the car market currently is and the number of car loan options available, it can quickly become overwhelming.

Since 2003, Rapid Loans has been helping motorists just like you, all across Australia, to achieve their car financing goals in a fast and more straightforward way. So, don’t bury your head in the sand just yet, here at Rapid Loans we want you not just to have dreams but also have real goals that we can help you achieve. We believe that begins with understanding how the car loan process works so you know what to look for and what questions to ask when researching your next loan provider.

What is a car loan?

A car loan is a type of personal finance taken out for the purpose of buying a new or used vehicle. With most lenders, this also includes all the fun modes of transport including motorbikes, caravans, boats and the ever-popular jet ski.

A car loan is a great option if you don’t quite have enough in savings to afford purchasing a vehicle upfront, but you have regular income that allows you to repay a loan in monthly, weekly or fortnightly instalments. According to a recent survey by Finder, over 12,000 respondents (around 14% of Australians) currently have a car loan – that’s the equivalent to 2.7 million people! Aside from buying property, whether for personal or commercial reasons, purchasing a car will likely be one of the biggest purchases you will ever make.

What is a secured car loan?

You’ve probably come across the terms secured and unsecured when researching car loans. When taking out a loan, secured car finance is where you offer collateral, such as the vehicle you’ve purchased using finance, to provide more security to the lender in the unlikely event that you fail to repay the money you have borrowed.

On the other hand, unsecured loans don’t require physical assets as security. Instead, the lender will generally look at the strength of your cash flow to approve loans for smaller amounts. You might find you need to provide less upfront information however unsecured loans may attract a higher interest rate as you’re deemed riskier to the lender, it’s worth noting that unsecured car loans are also not that common.

You might find that secured car loans have a lower interest rate than a standard unsecured loan, simply because the asset can later be sold to recover the funds that you were unable to repay. If you are going to use the vehicle as added security for the loan, it will need to meet certain roadworthy criteria, be comprehensively insured, and not have any other financial encumbrances attached to it.

How does car financing work?

If you’re just beginning your search for your dream car or have found what you want but are still weighing up your options, you can get started by applying online for pre-approval finance before making an offer. This means you go through the application process and, if you meet our lending criteria, you’re eligible for a loan of a specific amount. Rapid Loans will provide you with documentation of your conditional pre-approval to take car shopping with you, with the maximum loan amount as well as any conditions you may need to meet before contracts are generated. This can give you the assurance you need to stick within a specific budget and maybe help narrow down your choices. When it comes to your new car, the price is what you pay for it and the value is what it will bring to your life. Applying for pre-approval can also help give you confidence in your negotiating power with a dealer as you have a set spending limit and preferred lender.

Once you decide on a vehicle, provide the details and any other specified conditions to Rapid Loans, your loan contract will be generated. You always need to ensure you read through and understand the credit contract before signing anything. This includes details such as the amount borrowed, term and any fees and charges associated with the loan. When it comes to the term, this is the period of time in which your loan amount and accrued interest will be paid back, made in regular repayments. Here at Rapid Loans, our loan terms vary from 18 to 60 months, however this will depend on a number of factors such as the loan amount and your financial situation. Lenders will also usually give you the option of making weekly, fortnightly or monthly repayments as this flexibility lets you line up your budget and incoming wages. Feel free to ask us if you have any questions about your Rapid Loans car loan contract however you can also get your own independent financial or legal advice on the contract if you require it.

Part of taking out any type of loan is paying interest on the balance of your loan, either at a fixed or variable rate, plus any fees and charges. A fixed rate car loan is where the interest rate is locked in for the entirety of the loan, while a variable rate loan is where the lender may change the interest rate during the term. It’s worth remembering that while interest rates differ across different lenders, it the interest rate is too good to be true, it probably is! You shouldn’t just look at the interest rate on its own though, you should also carefully consider the fees and charges and what the total cost of the loan will be. There are pros and cons to both fixed and variable interest rates however, a fixed interest rate with Rapid Loans means you’ll be certain of your repayments throughout the loan period, making it easier for you to budget wages while managing your cash flow and household expenses. It can also save you money in the future if interest rates rise and ensures you aren’t worrying about what these changes will mean for your monthly spending. Alternatively, a variable rate may mean you pay less interest if rates are cut, but it also means you run the risk of the lender increasing the rates during the term to meet fluctuating changes in the market. This might not be the best option if you expect interest rates to rise over the next few years. Either way, your interest rate will be outlined in your contract and might depend on a number of other factors such as your borrower profile, loan product and principal amount.

When taking out a car loan, it is compulsory for you to take out comprehensive car insurance for your new vehicle and keep your vehicle insured until your loan is paid in full. Comprehensive car insurance covers damage caused by you to third parties and your own vehicle, regardless of who is at fault. This is required by lenders to cover the vehicle if it is written off, stolen or vandalised before the end of the loan term, while also covering you if you don’t have the upfront money to either fix or replace the vehicle. If your vehicle is written off or stolen, insurance will either payout your loan in full or payout part of the balance, depending on how much you have insured the vehicle for and how much you have left owing on the loan. It’s important to remember that you will need to repay any balance owing on the loan if the insurance payout does not payout the loan in full. This is different from compulsory third party (CTP) insurance, which is legally required in all states and territories of Australia and is included in your registration. Policies you compare might include extras like emergency repairs, hire cars, hotel stays and contents coverage, however this will vary by policy, insurer, car value and premium.

Once you’ve then found the right car, you can speak to one of our friendly car loan consultants to have the loan application finalised, receive final approval, sign the contract and have the funds disbursed to either the car dealer or the private seller. If this is your first time taking out a loan, it will put your mind at ease to know that around 19% of Australians have previously taken out a car loan to purchase a vehicle and we have helped more than 50,000 people across Australia reach their goals. All we can say is that nothing will beat that first drive in your new car!

Can car loans be restructured?

Restructuring your vehicle loan is where you borrow money from a new lender to pay off your current lender according to the terms of the new loan contract. Restructuring is also commonly referred to as refinancing and may help with debt consolidation from credit cards, car finance and other consumer costs. We understand that being in multiple types of debt can be stressful so structured payments like this can give you the confidence and peace of mind you deserve.

You might choose to refinance your loan because a new lender can give you a lower interest rate which will reduce your regular repayments, they’re offering longer loan terms which means you can cut your regular repayments by extending your loan term as the loan principal is divided by more months, or simply because you’d like to add or remove a co-borrower.

You will need to call your current lender and ask for the payout amount, or add up all your varied debts, as you will need to be able to provide other lenders with this information so they can assess your eligibility for a new loan. If approved, you can then use that loan to pay off all the money you currently owe. It’s worth finding out what fees you will incur by refinancing as your old lender may charge a discharge fee and your new lender may charge an application fee. Ultimately, you want your new loan to save you money on interest and fees while allowing you to make lower monthly repayments and maybe even borrow extra money if needed.

Can I sell the vehicle that I have purchased with a car loan?

As the car financed with the loan is security for your car loan, the lender will need to register a security interest on the Personal Properties Securities Register, which will stay on your vehicle until the loan is paid in full. The Personal Properties Securities Register is an online government noticeboard of security interests in personal property. This means you cannot sell or dispose of the vehicle without the lender’s permission whilst you still have an outstanding balance on your loan.

If you are thinking about selling the vehicle, you will need to contact your lender to discuss this as the lender will generally not release their encumbrance over the vehicle until they have received full payment of the loan.

It is important to remember that even if you no longer have the vehicle, for whatever reason, you are required to continue with loan repayments until the loan is paid in full.

Can car loans be paid off early?

Paying off your loan early isn’t required but the option is often available for you to make extra repayments. With Rapid Loans, you can make an extra repayment at any time with no fees, or you can pay the amount required to finalise your loan on any day you wish to end your contract without an early termination fee. If this is something you’re interested in doing, you can request a payout quote from Rapid Loans.

If your car loan is with a different financier, it’s worth noting that depending on the type of agreement you have with your lender, if you want to make extra payments from time to time and pay out your loan early you may be charged an early termination fee, which will be stated in your contract along with any other relevant fees. This is because some financial institutions will be looking to recoup some of the prospective revenue losses caused by your early payout.

Some lenders may instead offer reduced monthly repayments if you pay a one off lump sum, also known as a balloon payment, at the end of the loan term. A balloon payment is a significant extra payment made on your loan that is greater than your normal payment.

We hope you found this general guide to how car loans work helpful. If you’re interested in taking out your next car loan with Rapid Loans, please don’t hesitate to get in touch with us or even begin your application now! Contact one of our friendly car loan consultants and take the first step to achieving your desired financial and lifestyle goals today. With 24-hour approval possible, if your application ticks all our boxes, you could be parking a new car in your driveway the next day. Here at Rapid Loans, we offer real and personalised service to find out exactly what we can do to help you purchase your next, or even your first, car. Use our easy online application to apply today for a rapid response.