The Different Types of Car Loans and Finance Explained

Unless you’ve got a solid stash of savings sitting in the bank, chances are you’ll need some kind of finance to get behind the wheel.

But between secured loans, personal loans, leases and “balloon payments”, it’s easy to get lost in the finance fog.

Let’s cut through the jargon and run through the main types of car loans in plain English.

Types of Car Loans, Explained

There’s no shortage of ways to finance a car. From traditional bank loans to salary packaging and even peer-to-peer lending. The tricky part is figuring out which option fits your situation best.

Before you sign anything, it helps to understand how each type of car loan works and what makes them different. Let’s run through the most common options.

1. Secured Car Loan

A secured loan is the most common type of car finance.

The car you’re buying acts as “security” for the loan – meaning if you don’t make your repayments, the lender can repossess it. Because it’s lower risk for the lender, secured loans usually come with better (lower) interest rates.

Your approval will depend on things like your income, credit score, and existing debts.

2. Personal Loan

A personal loan isn’t tied to the car, which gives you more flexibility – you can technically use the money for anything.

The trade-off? You’ll generally pay a higher interest rate because the lender has no asset to fall back on. Still, it’s a good option if you’re buying from a private seller or want to use part of the loan for related costs like rego or insurance.

3. Green Car Loan

If you’re eyeing off a hybrid or EV, a green loan might be worth a look.

Some banks and lenders offer special car finance rates for low-emission vehicles, giving you a cheaper loan and helping the planet at the same time. Win-win.

4. Using Your Mortgage Redraw

If you already own a home, you might be able to dip into your mortgage redraw to pay for your car.

The big perk is the lower interest rate – home loan rates are typically much cheaper than car loan rates.

The downside? You could end up paying more interest overall since home loans stretch over decades. Do the math before you decide.

5. Peer-to-Peer (P2P) Lending

Think of this as borrowing from regular people, not banks.

Peer-to-peer platforms connect borrowers with investors online. The process is usually quick and competitive, but your credit score still matters – it’ll determine what rate you’re offered.

As always, shop around and read the fine print.

6. Rent-to-Own Cars

With a rent-to-own deal, you make weekly or monthly payments to use the car, and at the end of the term, you can buy it outright (usually with a lump sum).

You don’t actually own the car until that final payment.

These can be helpful if your credit history isn’t great, but they tend to be more expensive overall.

7. Novated Lease

A novated lease (aka salary sacrifice) is a setup between you, your employer and a finance

 company.

Your employer makes the car payments straight from your pre-tax income, which can lower your taxable earnings.

It’s a neat perk if your employer offers it, but there are rules, and it doesn’t suit everyone – especially if you change jobs mid-lease.

8. Dealer Finance

Most dealerships will happily sort out your car loan for you on the spot.

It’s convenient, but not always the cheapest. Dealer finance can come with higher rates or hidden fees that offset the “special deal” they advertise. Always compare what the dealer offers with a quote from your bank or credit union before signing anything.

9. Balloon Payments

You’ll often see car loans that include a balloon payment – a big lump sum due at the end of your loan term.

It keeps your regular repayments lower, but you’ll need to pay (or refinance) the balloon when the time comes.

If you plan to upgrade your car regularly, this setup might work well. If not, that final bill can sting.

10. Fixed vs Variable Interest Rates

A fixed rate loan keeps your repayments the same for the entire term, which makes budgeting easy.

A variable rate can change over time, meaning your repayments might go up (or down).

Fixed rates offer certainty, while variable rates can save you money if interest rates drop – but it’s a gamble.

Final Thoughts

Choosing the right car loan really depends on your situation – your credit score, job stability, and how long you plan to keep the car.

Before signing anything, do a quick comparison online or talk to a financial adviser.

And most importantly, always read the fine print – it’s the best way to avoid surprises later on.