A Beginner’s Guide to Car Financing

A Beginner’s Guide to Car Financing

While prospective buyers will spend countless hours analyzing and researching the car they would like to buy, few employ the same commitment when determining the right financing option for their purchase.

Knowing what financing options are available will allow you to drive away with the right car and the right deal.

Let’s look at the different car finance options available to you below.

  1. Car loan

Put simply, a car loan is a personal finance product given to you by a financier to fund the purchase of a vehicle for personal use. Car loans can be secured or unsecured.

The main difference between a secured and unsecured car loan is that with a secured loan, the financier has security over the loan in the event that you stop making payments. The lender can seize the asset (in this case, the car in question) as collateral should you default on the car loan.

Because the lender has security on the loan, interest rates tend to be lower on secured car loans.

This type of financing option is ideal for the first-time car buyer, particularly young adults without a mortgage.

  1. Dealer finance

Dealer financing is exactly as it sounds: The dealership or retailer will arrange financing for your vehicle with a lender. This type of financing option is convenient as you can negotiate with the dealership and potentially drive off the lot in a matter of minutes.

This means you may have access to lower interest rates than are available with a car loan, resulting in lower repayments. With access to such low-interest rates, be sure to check the terms and conditions and early exit options as the fees and charges may be higher.

  1. Novated Lease

A common instrument used in Australia to finance a car, a novated lease is a three-way commercial finance agreement between yourself (the borrower), your employer, and a finance company.

Essentially, this means your employer pays for the car lease and its associated costs through your salary package.

Novated leasing is a cost- and tax-effective method for you to acquire the car of your dreams. Payments are taken from your pre-tax earnings, meaning your taxable income is reduced. Novated leases are also GST-free.

All payment obligations fall to you, the employee, meaning even if you decide to leave your company, employers are not liable for the finance agreement.

This type of commercial financing option also comes at no cost to employers as novated leases are not calculated as a business asset or liability.

  1. Chattel Mortgage

A chattel mortgage is a commonly used commercial finance product that many Australian businesses use to finance a car (individuals are also eligible for a chattel mortgage as long as the vehicle is predominantly used for business purposes).

As a secured commercial finance product, you, as the borrower, obtain a loan from a bank or lending institution to take ownership of the vehicle (chattel). The financier then takes out a “mortgage” over the vehicle as security for the loan.

While comparative to a secured car loan, a chattel mortgage is worth considering for business owners looking to finance a car.

Significant benefits provided to business owners through a chattel mortgage include:

  • Flexible loan repayment periods
  • Increased business cash flow
  • Claimed tax deductions as the vehicle is used for business purposes

Park your money with car financing

When it comes to car financing, one size rarely fits all. Different financing options will suit different people. As such, it’s good to know what options are available to you.

Car financing allows you to make good financial decisions that ensure you drive away with both a well-priced car and a great financing deal.


Rob Chaloner is the Founder and Managing Director of Stratton, and is passionate about smarter ways to buy and finance cars. With Stratton, he’s working to help Australian buyers disrupt the traditional car buying, financing and insurance markets through smarter products and online services.


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