What is a used car loan?
A used car loan is a personal loan you can use to buy a vehicle with a few years on the clock. Many lenders offer special products specifically for buying used cars, with the vehicle as security. You could also use an unsecured personal loan to buy a used car, but the interest rate will likely be higher.
Car loan lenders usually have an upper limit for how old the vehicle can be. New car loans generally require the vehicle to be three years old or younger, while used car loans might allow up to 12 years - certain lenders even have no upper age limit. However, used car loans generally have higher interest rates than equivalent products for new vehicles.
Used car loan interest rates
Car loan lenders often charge higher interest rates when the vehicle is older. If the borrower defaults and the vehicle repossessed, the lender wants to be able to resell it to recoup some of the outstanding loan amount. There tends to be a higher chance of older vehicles breaking down, becoming inoperable, losing their resale value, or becoming a repairable write off, so there are often higher rates charged to compensate for this risk.
Compare used car loans
There are several things to keep in mind when choosing between used car loans.
Interest rates
The interest rate you'll pay on your car loan is likely your primary concern. Car loan rates can vary widely so it can pay to do a bit of research to find lower rates. Many car loan products don't have a single advertised rate, but a range - where you end up on that range generally depends on your credit history, as well as the age and condition of the vehicle you're buying. For example, at the time of writing CommBank offers car loan rates with a spread of four percentage points.
Used car loans can have variable rates, although fixed interest is a bit more common.
Fees
Used car loans often have extra fees on top of your interest bill. You might need to pay fees for the loan application, establishment and servicing, while there will also often be charges for paying it off early or missing repayments.
These fees can add up, so it's worth taking the respective extra charges on various loan products into account. The comparison rate is a good way to quickly compare the true cost of different loans, taking these extra costs into account.
Borrowing power
Most used car loan lenders have a minimum and maximum amount allowed. This is often a wide range - $5,000 to $150,000 is common - so it's often not a problem. However, if you're looking for a very small (or very large) loan for your used car, you might be restricted by certain lenders.
Loan term
Car loan terms typically range from one to seven years. Longer terms can mean lower repayments, but a larger overall interest bill over the life of the loan.
The age of the used car can affect the loan terms available to you. Lenders may impose an upper limit on the car's age at the end of the loan term, often 12 years. That means if you're buying a car that's seven years old, you'll only be able to borrow for up to five years even if the lender offers seven year terms.
Extra features
Many loan products offer additional features to entice borrowers. This might include free and unlimited extra repayments or a redraw facility that lets you take out anything you've paid above the minimum.
It's also common for car loans to include a balloon payment. This basically means instead of splitting the entire amount over the term, you instead pay back a lump sum chunk (typically 30-50%) at the end. This lowers your regular repayments, although since you're still charged interest on the balloon amount it can be more expensive overall.
Balloon payments can be great if you plan on selling the car before the end of the loan term - you can use the proceeds of the sale to pay off the balloon amount. However you'll want to make sure you can cover the the residual amount; it can be quite a shock if your car sells for less than what you still owe and you don't have the extra cash to pay for it.
Is buying a used car a good idea?
Buying a used car can be a great way to save on your latest set of wheels. Vehicles generally depreciate quite quickly - new cars can lose more than 10% of their value the second they leave the showroom, while it's normal for a further 10-15% depreciation over the first year. By waiting just a few years into a car's life cycle you might be able to get basically the same ride for a fraction of the price.
At the same time, there are risks to buying second-hand. As we touched on above, older cars can be more susceptible to engine problems and other issues. Major services tend to happen around the 100,000km mark. This might mean an expensive trip to the mechanic, not to mention the inconvenience of a breakdown. The extra risk also can mean it's more expensive to insure older vehicles, not to mention the higher interest rate.
Dealership vs Private Sale
When buying new cars you're generally restricted to dealerships or direct via manufacturer, but if you're buying secondhand you might find yourself buying privately. Used cars are frequently advertised on platforms like CarSales, Facebook Marketplace or Gumtree, and you might find you're able to find better deals by avoiding dealers.
However, buying privately also means you need to be careful of scammers, not to mention dodgy vehicles. You should make sure the vehicle you're looking at has up to date roadworthy certificates and is mechanically sound before you hand over anything. It's also worth checking whether there are any encumbrances on the car using the Vehicle Identification Number (VIN) in a PPSR check. This ensures you aren't buying a vehicle that's been stolen, written off or encumbered by an outstanding loan.
