What Car Loan Should I Get?

Before you choose your car loan, there are some essential questions that you need to ask to make sure that you're looking for the right type of car loan for your purposes.

1. How will the car be used? Business or personal use?
2. How will you pay for the car? Are you a PAYG employee in a stable role?
3. Is this a second family car?
4. Do you have complete financial information for the recent financial year?
5. What's the age of the car you're looking to buy?
6. Do you know your credit rating?

Once you have the answers to these questions, you're ready to narrow down suitable types of car loans.

Which car loan should I get?

Choosing your car loan is as easy as understanding how your car will be used, and what your current financial situation is.

1. Car mostly for business

If your car will be used primarily to run a business, you should consider a chattel mortgage.

A chattel mortgage is a secured car loan taken out by a business.

Things you need to know about a chattel mortgage:

• The business owns the car and is responsible for the car loan payments
• You can use the car for personal use, as long as it's less than 50 per cent of the time
• Security over the car is registered with the PPSR for the duration of the car loan

When you apply for a chattel mortgage, you will use your business financial statements, including Profit and Loss, BAS, and your business account statements. A chattel mortgage will usually be approved within 24 hours of providing the complete documentation.

You'll need to have a registered ABN that's been trading for 12 months, and show that your business has the cash flow that's required to meet car loan repayments for the amount that you borrow.

2. Car for personal use

Personal secured car loans allow you to own and use your car privately. The amount you can borrow and type of car that you choose to buy is entirely up to you, within the limits of your income.

A secured car loan is used to buy a car for your personal use.

To apply for a secured car loan, you'll need evidence of income, such as payslips, and some information about yourself and the car you'd like to buy.

When you use a secured car loan:

• You can purchase a car that's less than seven years old
• You can buy from a dealership or a private sale
• A security over the car loan is registered on the PPSR for the duration of the loan

When you take out a secured car loan, you will be personally responsible for making the repayments. If it's your first car loan or the car is a second family car, you might consider having a co-signer or co-borrower on the loan to boost your eligibility.

3. Car loans for PAYG employee

If you're a PAYG employee in a stable career, you can consider a novated lease, which can potentially provide you with tax benefits. You also have the option to include some running and maintenance costs in the pre-tax payment.

A novated lease is a car loan for PAYG employees where car loan payments are made from pre-tax income.

A novated lease is good when:

• You earn a medium to high income
• You are in a stable career path
• The car is for personal use

To take out a novated lease, you'll need the agreement of your employer. This isn't usually a problem, and many employers will already have novated leasing arrangements in place as part of their employment benefits.

If your employer doesn't have these in place, you can make the arrangements directly with a novated leasing provider and your employer.

Novated leasing can be complex with Fringe Benefits Tax that applies instead of income tax. Before choosing a novated lease, it might pay to get your accountant to take a look at how it can benefit you over a regular secured car loan.

4. Car loans with low financial information

If you are a tradesperson or small business owner, you might not have extensive financials. To cater for this, lenders offer low doc car loans, which can be approved based on some alternative documentation.

Low doc car loans allow you to finance a car when you don't have extensive financial information.

When a low doc car loan is right:

• You have tax returns but not regular payslips
• Starting a business or sole trader
• Short credit history

When you apply for a low doc car loan, you'll usually be offered a slightly higher interest rate. Like other types of car loans, this loan will usually be secured against the car you buy. You can improve your likelihood of approval by putting a deposit towards the purchase.

To be approved, you'll need to show that you can afford to meet the repayments for the amount you borrow.

5. Car loans to buy older cars

To buy a car older than seven years, you'll need to take out an unsecured car loan. This is because the value of the car is a little less predictable once it reaches seven years.

Unsecured car loans are used to buy cars more than seven years old.

An unsecured car loan is good when:

• You want to purchase an older car
• You need to use some of the funds for another purpose

To be approved for an unsecured car loan, you'll follow a similar process to a regular car loan application. The interest rates are a little higher, as no security is provided to the lender.

If you're expecting a change in your financial circumstances, speak to a car lending specialist about your loan options, as it might be worthwhile waiting until these changes are in place before applying - especially if you're starting a new job, or returning to work from maternity leave.

Before you apply for a car loan, find out what your credit rating is. This will help you to know what to expect when you apply, and guide your choice of a car loan.

When you seek the advice of a lending specialist, they'll perform a soft credit rating check as part of the service, and help you to choose the right car loan for your circumstances.