What is a car loan?

Having your own car allows you to go from one place to another without the hassle of commuting. While it's a good investment, it's a huge financial commitment that not everyone can afford. Fortunately, car loans exist to help you buy a car.

A car loan is a personal loan you can use to purchase a new or used vehicle when your current savings aren't enough to cover the total cost in one go. You are required to pay this loan regularly over a fixed term, including the interest costs which will apply on the loan amount from the time you take out the loan.

It's ideal to check your options first before choosing a loan. Don’t settle on the first one offered just because it has the lowest interest rate. There are many factors that make for a good auto loan, and it’s important to use a comparison tool to see your best options.

What are the types of car loans?

There are several types of car loans available in the market to meet your financing needs.

  • Secured Car Loan - a loan that doesn’t require you to provide collateral
  • Unsecured Car Loan - a loan that requires you to provide collateral
  • Balloon Payment Car Loan - this loan has lower ongoing repayments at the beginning and ends with the borrower paying a larger portion at the end of the loan term
  • Chattel Mortgage - a common type of finance that allows you to loan and purchase a vehicle for business use
  • Operating Lease - A car rental agreement where the borrower leases a new vehicle for a fixed amount of time
  • Commercial Hire Purchase - a finance company buys a car on your behalf, which you can use in exchange for regular rental payments, and buy eventually
  • Car Lease - Similar to a commercial hire purchase but with more options
  • Novated Lease - A three-way agreement where you get a vehicle from a second party which in turn leases it from a finance company
  • New Car Loans - For purchasing a car less than two years old
  • Used Car Loans - For buying a car more than two years old
  • Green Car Loans - For buying an eco-friendly car

How do car loans work?

A car loan is a certain amount of money that a borrower receives from a lender to help you buy a car from the vendor — the person selling the car, a car dealership.

How it works:

  • Compare car loans and choose one that best suits your needs
  • Fill out and submit a loan application to your chosen lender
  • If approved, the lender will let you borrow you a certain amount of money to purchase your chosen vehicle
  • Once you've signed the purchase agreement with the vendor, your lender will pay the vendor on your behalf
  • You are required to repay the lender based on the agreed terms and conditions, which usually lasts for several years

The maximum loan amount you can borrow may vary, and usually have loan terms from 1 to 10 years. Interest rates may also range from 5.03% and up to 24.95%, depending on the car loan.

Repayment for car loans usually has fixed rates. This means you will have to pay the same amount for the life of the loan. Other loans have variable rates which come with terms such as extra repayments or redraw facilities.

Car loans may have lower interest rates than an unsecured personal loan since it's usually secured by the vehicle you're purchasing.

What is the difference between a car loan and a personal loan?

A car loan is a type of personal loan made to help people purchase a vehicle. The money you get from a personal loan can be used for different purposes such as holiday trips, renovations, etc. while a car loan is exclusive for vehicle purchases only.

A personal loan can be either secured (against a nominated asset) or unsecured. A car loan on the other hand, is generally secured against the vehicle as collateral for the loan.

Since there is usually no collateral provided in an unsecured loan, they also tend to have higher interest rates.

What are the advantages and disadvantages of a car loan?


  • It allows you to have more car options to choose from which you might not have been able to afford.
  • You have enough time to repay a car loan (as long as ten years).
  • Interest rates may be lower compared to other finance options like an unsecured personal loan.


  • Since most car loans are secured against the vehicle, the lender has the right to seize the asset if you default on the loan.
  • There may be some restrictions on the type of car you can purchase, including whether it's new or used, if it's a sports car, etc.
  • Your borrowing capacity and creditworthiness may limit the amount you can loan.

How much can I borrow with a car loan?

Applying for a car loan doesn't mean the lender will automatically approve your desired loan amount. The amount you can borrow will depend on your current financial situation, including your income, expenses, and credit score. This is for lenders to make sure that you are capable of repaying the loan and that you're not at risk of defaulting on the loan because of past adverse credit events.

If you want to get an idea of how much you may be able to borrow, there are many online car loan calculators available for you to try. To get an estimate, all you need is to provide basic information such as how much you want to repay, repayment frequency, and the loan interest rate.

It might also be worth checking your credit score as it's part of a car loan lender's eligibility criteria. Applicants with good credit scores have higher chances of getting approved.

Are there any other costs to consider?

When you calculate how much you can afford to borrow, it's ideal to include other costs involved with getting a car to make sure you are budgeting correctly.

The costs may differ depending on the car you own or planning to buy, which can include the following:

  • Registration
  • Car insurance
  • Stamp duty
  • Consumable (petrol, batteries, etc.)
  • Servicing
  • Maintenance and repair costs
  • Road tolls

How to apply for a car loan?

Applying for a car loan should be easy if you do your research well. Here are the steps:

  • First, check your credit score
  • Search for car loans and compare
  • Assess your budget
  • Check if you are qualified to apply
  • Prepare all the necessary requirements
  • Submit your car loan application and wait for the approval

What are the requirements to get a car loan?

The eligibility criteria may differ for each lender, but they usually require the following:

  • Proof of age, identity, and residence
  • Proof of income and expenses
  • Information about your assets and liabilities
  • Proof of savings
  • Good credit score
  • Information about your choice of vehicle and insurance

How do you compare car loans?

When it comes to comparing car loans and choosing what’s best for you, consider the following factors:

Interest rate

A loan's interest rate has two parts:

advertised rate - the interest rate you pay on the loan

comparison rate - a combination of the advertised rate plus the main fees

Consider and evaluate both options so you have a better idea of the total cost of the car loan.

Rate type

Assess the two interest rate types: fixed rates and variable rates. Choosing a fixed rate means repaying the same amount throughout the life of the loan, which could help you budget wisely.

Choosing variable rates means your repayments may increase or decrease depending on the market during your loan's term.

Loan type

There are two types to choose from: a secured loan and an unsecured loan. In a secured loan, the vehicle will be used as collateral.

Take note that while there are no collaterals provided for unsecured car loans, the lenders typically charge higher interests as there may be more risk posed to them.

Loan term

You can opt for a short term loan (1-3 years) or a longer term (4-7). A short loan term might mean higher repayments, but lower interest and a long loan term might mean lower repayments, but higher interest.


Here are some fees that may include when you take a car loan:

  • Application fees
  • Establishment fees
  • Monthly fees
  • Early repayment fees
  • Early exit fees
  • Redraw fees
  • Late payment fees


Some car loan lenders offer features such as the ability to make extra repayments, choose your loan period, and a redraw facility.

How do you pick the right car loan?

There is no one right car loan for you, and the best car loan is the one that suits your vehicle needs and financial situation the most. Fortunately, there are numerous NZ car loan providers to choose from that can accommodate your needs.

Just like shopping, it's an ideal part of the process to compare your car loan options before choosing. You can easily do this by using a comparison tool, which allows you to see all your options, plus the features they offer!