How Does Financing A Car Work: Your Complete Guide

Buying a new or used car can be an exciting time. You may be looking forward to getting behind the wheel of your dream vehicle, enjoying all of its different features, and driving it around with pride. However, if you do not have the savings to buy one outright, an option you may be considering is taking out a car loan. Before you sign up for one though, it can be important to understand the basics, including what vehicle loans are and how they typically work.

The Basics: What Is A Vehicle Loan?

A vehicle loan, including business car finance, is essentially a contract between two parties that allows one party (the lender) to give money to another party (the borrower) in exchange for compensation over time. The compensation comes in the form of interest rates that help cover the costs associated with extending credit.

The borrower agrees to pay back the amount borrowed (generally monthly repayments) plus interest and some fees within a certain period of time (normally between one to seven years). If he or she does not pay back all amounts owed before the deadline expires then foreclosure proceedings will begin on his or her property until everything has been paid off in full.

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    How Do Vehicle Loans Work?

    Vehicle loans or car financing work much like other types of loans; they have rules and regulations. You need to make sure that you understand all of these rules before signing any documents so that there are no surprises later down the line! Don’t worry, with Driva there aren’t any, you can get your best car loan options with no hidden fees.

    Vehicle loans are essentially mortgages on vehicles that allow people to purchase cars they otherwise may not be able to afford. They are also known as "vehicle financing," “secured car loans” or "vehicle loans." Each lender or financial institution has different requirements for eligibility and interest rates vary based on credit history. The most common type of car loan is an instalment loan where borrowers make monthly payments over time until their debt is paid off in full.

    For more information on how much to spend on a new ride check out our article 'How Much Should You Spend On A Car?'

    Is Financing A Car Worth It?

    In addition to requiring less money up front than buying with cash (paying cash), taking out a car loan has other advantages as well:

    • Car loans work by lowering your monthly payments compared to leasing.
    • It allows you more flexibility on purchase price when choosing your next vehicle because you are not restricted by your current financial standing (or cash in the bank).
    • You can use depreciation as a tax deduction when purchasing new cars.
    • If you run a business, a business car loan can give you more freedom and flexibility of cash flow by having a consistent monthly car payment, and the ability to grow your business.
    • It can help you improve your credit rating if you make all your monthly repayments.

    Need some more info? Check out our guide on 'Is It Worth Getting A Car Loan?'.

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    What Type Of Vehicle Loans Are Available?

    There are many different types of car loans available on the market today. Some examples include:

    Secured car loan: 

    In this situation, your car is used as collateral for the loan. This means that in the event you’re not able to meet your monthly payment obligations, the lender has the ability to reclaim the car in order to recover their funds (the oustanding loan amount). This is best suited to new car loans. 

    Unsecured car loan

    In this situation, you won’t need to use your car or any other asset as collateral against the loan. Usually, unsecured loans have higher interest rates when compared to secured loans. This type of loan is most suitable for older and used cars.

    Personal loan: 

    Is similar to an unsecured car loan, however with a personal loan you’re not restricted by what you can spend your money on. If you’re taking out a personal loan that is more than the amount your car is worth, you can spend the extra money on things like registration, insurance or petrol. 

    Commercial car loans: 

    Are solely for cars used for business purposes. At Driva, some of our most popular commercial auto loan products include hire purchases, chattel mortgages, finance leases and novated leases.

    How Does Car Finance Work?

    Car finance involves a formal vehicle finance arrangement between the following parties: the buyer, the vendor, and the car lender. At Driva, the car financing process works by following the below steps:

    1. Compare car loans from more than 30 lenders to see your best eligible options.
    2. Decide which lender you’d like to proceed with.
    3. If approved, the lender will lend you a certain amount of money to buy your dream car. 
    4. Approve and sign the purchase agreement with the vendor of your purchased vehicle, and the lender will pay the vendor on your behalf.
    5. You’ll make regular repayments to the lender over a period of one to seven years to pay back the loan. 

    When applying for a car loan, you should note the average amount most cars cost; they range from a couple thousand to $100k+ for luxury vehicles and these loans generally are between 1- 7 years in length.

    If you can afford it, it’s a good idea to outlay a down payment on your car loan. This will decrease the amount you have to pay back with interest so you can repay the loan early, as well as help you avoid owing more than what the car is worth due to depreciation. For many drivers, a deposit of around 20% can be a good place to start. So, if you were buying a car for $20,000, you could put down a 20% deposit of $4,000 loan.

    Does Financing A Car Hurt Your Credit?

    If you're planning on buying a car, you may be wondering if taking out a car loan will negatively impact your credit score. The good news is that it can actually help your score!

    Taking out a car loan and repaying it in a timely fashion will be recorded in your credit report as positive behaviour and can increase your overall score. You may find that if you took out your car loan at an average or low score, you might qualify for a lower interest rate on a different car loan in the future. 

    However, not all car loans are created equal. If you choose to take out an unsecured loan, which means that no collateral is used to secure the loan, this could potentially hurt your score in some situations more than other loans, if you are unable to make your repayments.

    How Does Car Loan Refinancing Work?

    Car loan refinancing is the process of switching from one car loan to another, in most cases with a different lender. This is generally done to access lower fees, a cheaper interest rate, an alternate loan term or easier repayment options to help you pay off your car finance sooner.

    Refinancing could save you thousands of dollars over the life of the loan, depending on how much you've borrowed and the new rate you’re eligible for. You can use our car loan calculator tool to get an idea of how much a new loan could cost you per month.

    The best way to find the ideal car loan is to research and compare your options.

    We can help here at Driva, our mission is to help you navigate existing finance lenders in the market. We take the hard work out of the online car loan application process from start to finish providing a seamless and hassle-free experience. 

    Learn more about car financing, or if you’re ready to get started you can access your personalised quotes here (with no impact on your credit score!). If you're an eco-conscious driver looking to purchase an electric vehicle, check out Driva's electric car loan options to find your best fit!

    Declan Flaherty

    As the Digital Marketing Manager at Driva you can find Declan during the day transfixed by a flurry of spreadsheets, mar-tech, Slack emojis and graphs all pointing in the right direction and keeping up to date with the latest car finance trends.

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