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Your Comprehensive Guide to the types of Car Loans

April 11, 2022
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types of car loans

Your guide to the types of Car Loans.

Purchasing a new car is an exciting thing – all your hard work is finally paying off!

When it comes to choosing how to finance your new vehicle, there are sure to be some questions bouncing around in your mind – things like how much you can borrow, how to refinance and what a secured loan is.

If you’re in the process of (or thinking about) buying a new car, here is your comprehensive guide to car loans.


How much can I borrow for a car loan?

How much you can borrow is entirely dependent on your financial situation.

When calculating what you can borrow, things like how much you earn, your monthly outgoings and your credit score will all be considered.

Some things a lender will use to guide them when deciding what you can borrow include:

  • Your total annual income
  • Whether you own property
  • If you’ve had previous finance
  • Credit score
  • Whether you’re putting down a deposit 

What is a secured car loan?

A secured car loan is where your car will be used as ‘security’ against your loan. If you don’t make your loan repayments on time, the lender may repossess your car and sell it to recoup the amount still owing. However, if the asset sale doesn’t cover the amount owed, the borrower will still owe the shortfall. Lenders prefer secured loans as they’re the less risky option if you default on your loan repayments.


There are benefits for borrowers looking to secure their loans. These may include:

  • Increasing your borrowing power
  • Access to a lower interest rate
  • Flexible terms
  • Faster approval

Unsecured loans are less favourable by lenders, as there is an added risk factor of no security against the loan. Due to this, an unsecured loan generally comes with a higher interest rate and sometimes may decrease your borrowing capacity.


How do I refinance a car loan?

You’ve heard of refinancing a home loan, but did you know you can refinance your car loan, too?

or car owners who want to reduce their monthly repayments, choosing to refinance their existing car loan to a different one that offers a lower interest rate, fees, or different loan terms is a great way to save some money.

Especially if the market has changed or your credit score has improved, it makes sense for borrowers to seek out a better deal.


To begin the refinancing process, it’s a good idea to contact a car finance broker who will evaluate your current loan.

They’ll look at aspects such as whether you’re eligible to refinance if you’ll need to pay any exit fees or other costs to pay out your current loan, whether the new repayments will fit into your budget and if any cost savings will make up for the cost to refinance.

From there, your eligibility to apply for a new car loan will be assessed the same way as it was the first time.


How do I calculate car loan interest? 

It’s sometimes difficult to calculate interest on a car loan as lenders don’t always advertise the interest rate.

You will only know how much a loan will cost you when a lender shows you the comparison rate, which includes most fees and charges that you’ll pay over the length of a loan term, shown as a percentage.

Interest rates on car loans can only be fixed.

This is different to a home loan where you’re able to have fixed and variable interest rates.


Interest makes up only one component of a car loan, alongside:

  • Fees (upfront and ongoing)
  • The amount you’re borrowing
  • The deposit (if any) on the car
  • The length of the car loan

Your interest rate will dictate how much your monthly repayments will be.

Although it might only seem like a few extra dollars on each repayment, the interest you pay on your car can amount to thousands over the term of your loan.

Find your potential repayments with our car loan calculator.

What is a balloon payment?

If you’ve considered a car loan, there’s a good chance you’ve heard the term ‘balloon payment’ before.

A balloon payment on a car loan is a lump sum of money you pay to your lender, generally at the end of your loan period.

While that might not sound like a good idea, it helps the borrower decrease their monthly repayments throughout the course of the loan.

The balloon payment amount may be something you can negotiate with your lender.


Can I get a car loan with bad credit?

The short answer to this question is yes; you can get a car loan with bad credit. However, getting a car loan will most likely be more difficult and expensive if you have a poor credit rating.

Some specific lenders specialise in loans for borrowers with a bad credit rating.

Lenders will assess your loan application against the same criteria as those with good credit ratings.

If you have a poor credit rating, you can expect to pay a much higher interest rate and fees.

Talking to a finance professional will help you find the best lender for your situation, and compare them against a range of lenders.


It’s not all bad, though.

Obtaining and paying off a car loan with poor credit may be a way to boost your credit score.


When it comes to purchasing a new car, it can be difficult navigating the financial aspects and the array of terms used.

If you’re looking to buy a new car, get in touch with our team of vehicle and equipment finance brokers today.

Confused by some of the lingo around car loans? We’re here to help!


Start your journey, contact Inovayt today