Planning to buy a second-hand car?
Great choice. 😎
With more than 2 million used cars changing hands last year, a second-hand vehicle is a smart way to get behind the wheel and save money, whether it’s your first car or your next car.
As car finance experts, we can’t help you spot a lemon from your dream car – but we can help you drive away with a used car loan that works for your financial situation.
From understanding key terms to comparing loan types and scoring the best interest rates, we make the process straightforward. Read on to avoid being ripped off and sidestep surprises with our definitive guide to financing a used car.
Table of Contents
Can I finance a used car?
Yes – you can finance a used car.
Like a personal loan, you’ll have to repay the amount borrowed (this is known as your principal) plus any interest and fees. Car loan repayments are typically made weekly, fortnightly or monthly, depending on the agreement with your lender.
It’s worth mentioning that used car finance typically comes with more strings attached than financing a new vehicle and you may be looking at higher interest rates.
“Wait, why am I getting higher interest rates?”
Your interest rate reflects the lender’s level of risk, and, unfortunately, second-hand vehicles come with a higher level of risk.
Used cars have depreciated significantly, which means you can snap up a second-hand vehicle at a lower price than a brand new model, which is great for you. However, since your car is worth less than a brand-new vehicle, lenders offset the lower purchase price by charging a higher interest rate on your loan.
Second-hand vehicles are also more challenging to sell, so if you fail to meet your repayments and your car is repossessed, your lender may attempt to offset potential losses through higher interest rates.
FIDO SAYS: Got your eye on a 1992 Toyota Corolla or something a little more recent? Lenders may have limits on the age of a used car to be eligible for a loan. For example, some lenders only offer used car loans for vehicles up to a certain age (such as seven years or five years), so it’s worth shopping around.
What type of loans can finance a second-hand vehicle?
There are two main types of used car loans: Secured and Unsecured.
Knowing the difference between each loan type can help you budget and better understand the financing option that works for you.
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Secured car loan
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Unsecured car loan
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A secured car loan is borrowed against an asset – in this case, your car.
For example, if you want a loan of $20,000 to buy a minivan for your family, the vehicle can be used as security. The loan is ‘secured’ because the lender may repossess your vehicle if you fail to meet your repayments.
Secured loans typically have lower interest rates than unsecured loans because there is less risk for the lender.
With an asset to secure the loan, lenders may be a little more lenient if you have a lower credit score.
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An unsecured car loan doesn’t require an asset to protect the lender.
Instead of securing the loan using your vehicle as collateral, your application is supported by your creditworthiness and ability to make repayments.
Unsecured loans typically come with higher interest rates, lower borrowing limits and shorter repayment terms because the risk to the lender is greater without an asset as collateral.
No need to worry about your car being repossessed, but you’ll need a good credit history to qualify.
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Some loans may also come with a feature that allows you to lower your repayments over the life of the loan with a larger lump sum final payment. This is known as a ‘Balloon Payment’ and can help offer extra financial flexibility.
What's the difference between used and new car loans?
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New car loans
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Used car loans
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Finance may be cheaper as new cars typically have a higher value
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Finance may be more expensive as used cars typically come with more risk
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Usually secured where your car is held as collateral if you fail to meet your repayments
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Usually unsecured which means the lender can’t repossess your car if you fail to meet your repayments
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May have lower interest rates and higher borrowing amounts than an unsecured loan
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May have higher interest rates and stricter borrowing conditions than a secured loan
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How do used car finance interest rates vary?
OK, we’ve got good news and bad news.
You’ll likely pay higher interest rates than someone financing a brand-new vehicle. On the plus side, several factors in your control may affect your interest rate.
Here are the top factors that will determine what rates you’re offered on your second-hand car purchase.
Loan type
As we mentioned, your choice of a secured or unsecured loan will have a significant effect on your interest rate.
Secured loans will typically allow you to borrow higher amounts, which means if you’re after a pricier second-hand car, this may be a good fit. As there’s less risk involved for the lender (since they can take back your vehicle and sell it if you default on your payments), you’ll generally enjoy lower interest rates.
Unsecured loans generally come with higher interest rates but don’t require an asset as security. Since there’s no collateral involved, unsecured loans generally carry more risk. This means you may be charged higher interest and more fees but there’s no risk of losing your car if you can’t meet your repayment obligations.
Loan term
The length of your repayment period can also influence interest rates. For example, shorter loan terms with higher monthly repayments may come with lower interest compared to longer terms that have lower monthly deposits but higher interest rates.
Car age
For secured loans, the age of your car at the time of purchase is an extra factor to consider. Many lenders have age restrictions, often requiring the car to be 12 years old or less at the end of a loan term. If you get an unsecured loan, the age of your vehicle typically won’t be considered.
Current financial position
Multiple people can apply for the same car loan and receive different interest rate offers. Your overall financial health influences this. Factors such as your income, debts, credit score, and the size of any down payment you may make all help lenders assess your borrowing capacity and eligibility for better rates.
FIDO SAYS: Consider your financial health and long-term goals before selecting your used car financing options. If your goal is to accelerate repayments and own your car sooner, a shorter term may be a better fit. If you want to keep payments and cash flow manageable, consider stretching out the term to a longer one, for example, 5 to 7 years.
Is there such a thing as a 0% interest car loan?
Yes and no.
Many car dealers advertise attractive “0% interest loans” to get you in the door – and the thought of paying zero interest is appealing!
Remember, lenders have to make money.
An interest-free car loan typically comes with a catch, like paying an inflated purchase price, hidden fees, or strict loan terms that place you under extra financial stress the moment you drive away.
If the thought of going solo doesn’t excite you… We don’t blame you. At Fido Finance, sourcing the best rates is just one part of what we do. By championing your financial well-being, we help you find the financing option that works for you now and in the future.
An obligation-free call with our experts can help you understand your borrowing potential, gain clarity on your options, and find the best rate with no nasty surprises.
How to compare used car loans
If you’re ready to pull the trigger on a car purchase, a little homework can save you thousands of dollars. Don’t love homework? No problem, we’ve done all the research for you.
Here’s what you should be thinking about when comparing your options.
Interest rate
The interest rate is the amount of interest you will pay on your loan each year. Interest rates can be either fixed or variable.
- Fixed interest rates are locked in through part or all of your loan term which means repayments are predictable.
- Variable interest rates may go up or down throughout your loan term which can mean lower or higher repayments.
Since variable interest rates are affected by changes to the market – not your lender trying to squeeze more out of you – it’s worth comparing options to see which may be a better fit over the life of your loan.
Comparison rate
A comparison rate takes into account your loan’s interest rate, as well as most upfront and ongoing fees. The comparison rate is designed to provide a more accurate estimate of the total annual cost of the loan, as interest rates can be misleading without factoring in other expenses and charges.
Here’s an example:
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Loan option #1
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Loan option #2
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Advertised interest rate of 6.30%
Fees and charges add up to 0.40%.
The comparison rate is 6.70%, which results in higher overall costs over the life of your loan.
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Advertised interest rate of 6.40%
Fees and charges add up to 0.10%.
The comparison rate is 6.50%, resulting in lower overall costs over the life of your loan.
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Fees and charges
Car loans can come with a range of fees you’ll need to factor in outside of your regular repayments. These can include Establishment Fees, Missed Payment Fees, Extra Payment Fees and Early Repayment Fees.
Don’t stress if that sounds like a lot of charges – many fees are tied to choices (like requesting extra statements or borrowing more money), while others can be minimised or avoided by finding the right loan product (which happens to be our specialty).
Loan term
The loan term refers to the duration during which you must repay your used car loan. Longer loan terms can come with lower repayments. However, it also means you’ll pay interest over a longer period.
Want to learn more? Fido Finance is here to help
If you’re planning to purchase a second-hand car, you’ve probably compared your options on Google and scrolled through comparison sites.
The problem with this DIY approach is that the figures you see are only ever indicative. In other words, they’re an educated guess about your interest rates, not a guaranteed commitment.
At Fido Finance, we provide clarity whether you want help understanding your options or you’re ready to be connected with 30+ lenders to find the best deal. Our team knows which lenders are flexible with credit history, income and car age so you can worry less about your finances and focus on your next road trip Spotify playlist.
Chat with a car broker to understand your financing options or call the team at 13 34 36.
