6 Types of Car Loans

different types of car loans

Every Australian deserves a car. They're convenient, comfortable, and quite useful when you need to get from point A to point B everyday. The trouble is that it's not exactly the cheapest or the easiest to come by. You also have to take into consideration which one suits your daily needs. Do you stick to the city or travel rough terrains? Do you go out solo, with a partner, or do you bring the whole family with you? All these things (and more) play a big role into which vehicle you should spend your money on.   When it comes to getting the car of your dreams, or at least an old reliable to suit your needs, an auto loan is your best bet. Whether it's a new or pre-owned car, vehicles in Australia come with a hefty price tag. If you don't have extra cash on hand, apart from your rainy day savings, you're better off paying a loan in increments to keep your cash flowing rather than paying in lump sum and being broke for a few months. The good news is that you actually have quite a few options available.

Standard Loan

Whether it's through a bank, credit union, or other organisation, a standard loan is when you borrow money from a lending facility to purchase a new or used vehicle. This is the most basic of all the auto loan types (can be secured or unsecured), but requires the most in terms of financial capability as this type typically comes with higher interest rates.   One of the good things about this loan is that if you know how to handle your money, the loan you take can include on-road costs. You also have the advantage of a variable interest rate because your finance will be secured against the car.

Novated Lease

If you've ever been with a company who offered car loans as an employee benefit, then you should be familiar with this one. The novated lease is a three-way agreement where your employer takes out a portion of your salary in exchange for vehicle benefits (in equal value). Your employer has the obligation to pay a financier through a novated deed on your wage, as you lease the car directly from the financier.   The downside to this type of lease is that all operating costs of the car from rego to insurance, to even servicing, tyres, and such, will be covered by you. Furthermore, when your employee contract ends, so the car becomes your sole responsibility without the benefit of pre-tax income.

Finance Lease

When a financier buys a car then leases it to you (whether for personal or business purposes) for immediate use with little to no capital outlay, this is called a financial lease. You have to pay a fixed monthly repayment and are financially responsible for the trade-in residual risk as well as maintenance of the vehicle. Much like getting car finance from Alpha, at the end of your contract you get to option whether to return, upgrade, or purchase the car for the residual amount. The upside to this is that you have low and fixed interest rates because the finance is secured against the vehicle.

Commercial Hire Purchase

When a financier buys a car and then hires it to a consumer over a set period, this is called a commercial hire purchase. Whether the loan was for an individual or a business, payment plans are generally the same with the entire loan spread in increments through a set period. When these payments are done, the vehicle is then transferred to the consumer.

Chattel Mortgage

Much like a commercial hire purchase, a chattel mortgage is when a financier advances money and then holds a mortgage over a car. This will be used as security for the loan. Consumers can finance the car's total purchase price, make an upfront deposit, or use a trade-in. At the end of the term a residual payment may be placed.   Unlike the commercial hire purchase, ownership with chattel mortgage takes at the time of purchase.

Operating Lease

When you have an agreement where your financier purchases the vehicle and rents it out to you, this is called an operating lease. The difference between this and a finance lease is that the ownership remains in the financier's name. The upside to this is that you hold none of the risks associated with ownership, including the residual at the end of the payment period. When the term ends, you have the option to buy the car or get another lease for a (typically) newer car.