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Your Comprehensive Bible -- The Five Commandments For Financing A Used Car

Hi there. It seems you have finally reached this page. If I am not wrong, you’ve decided to get home a pre-owned vehicle. And mark my words, it is a good choice if this is your first purchase and you’re planning not to burn a hole in your pocket.

Well, you would never buy a car without physically checking it out first. Right?

Similarly, financing a used car without proper research is like trying to figure out the difference between freshwater and seawater by simply looking.

But luckily, you are in the right direction!

The good news is, the Australian used car market is huge. According to research, approximately between 2 and 2.5 million used cars — compared to around 1.1 million new cars -- are sold every year in the island continent. Below is a snapshot of the major statistics of the automobile industry in Australia: 


annual car sales market 2.png


Here’s what marketing management lecturer of Monash University -- Ms Linda Brennan has to say about the used vehicle market in Australia -- in a research project conducted by the institute: 


ms brennan.png


You now know that purchasing a second hand vehicle is totally a viable option. However, a major concern here is your finances.

Since I had already referred to this golden guide as your official bible for financing a used car, let me the lay down the five commandments in this process.


Commandment 1 - Decide On The Type Of Loan

Yes, there are two methods through which you can finance a used vehicle. And I will guide you through the application of both these options.  

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How To Secure A Direct Loan?

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  • Check your credit score report: With a good credit history, you are classified as a prime borrower, whoN can negotiate the best interest rates

  • Get in touch with your bank: If you have a savings account in a bank, contact them at once. A good history with your bank goes a long way in securing a prime-rate deal

  • Check out online lenders and credit unions: Credit unions are more generous in terms of loan terms and requirements. An online lender might offer even lower rates than the former brick-and-mortar organisations. However, they may come with more restrictions -- such as limitations on the age and mileage of the vehicle

  • Compare multiple quotes: This is necessary. With multiple quotes from different lenders, you are at a better position for negotiation

  • Fill out the loan application form: Once you have chosen your lender, fill up the application form -- which will require basic documentation such as driver’s licence for identification, income and debt data, credit score, and others

  • Negotiate with the dealer: Now that you have your finances secured, negotiate with the dealership for a price that suits your budget. Enquire about any available discounts


How To Secure A Loan Through A Dealership?


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  • Research on various interest rates: Different dealerships offer different interest rates. Know your credit score to check your eligibility for a particular financial offer
  • Select your car: Go through the inventory of the dealership to choose a model and make according to your preference
  • Offer a sizeable down payment: I would strongly advise you to offer at least 10 to 20 % of the total price of the vehicle as down payment. This is because cars depreciate in value and it is best to finance the minimal amount of its total price
  • Keep your documents ready: Similar to a direct loan, a dealership loan application will require basic identification and income-proof documentation
  • Negotiate for the best deal: Discuss with your dealer about the best loan terms -- which include tenure, interest rate, and monthly instalment. Review each clause on the application form and check if you can improve on it


Commandment 2 - Research On A Suitable Car

I would say this is of paramount importance. Older the vehicle, more difficult it is to avail a used car loan. Why so?

The vehicle you seek to buy will be used as security over the loan. The restrictions put forth by lenders is to ensure that the car is secure to repossess and recover your loan amount in the unlucky event of a default.

Therefore, it is important to settle on a model and type that suits all these requirements. I would personally recommend going for a comparatively new vehicle in order to avoid a possible disappointment down the road.


Commandment 3 - Do Your Own Calculations

For a mathematical geek like me, I would love to layout the various cost factors for a used car purchase -- to make the calculation a tad simpler for you. Check these out:


car loan cost factors.png


Consider all the above cost factors and estimate the exact amount that you need to pay for your car.

If you have the figures right, you can strike a better deal. You can even go for a lower loan amount with less monthly instalments and a shorter term.


Commandment 4 - What To Opt For? Car Loan Or Personal Loan?

I had already mentioned that one option to go for is a bank loan. But did you know, there are again two types?


types of bank loans.png


If you have a hard time deciding between the two, let me help you with the differences:

A personal loan is an unsecured loan with a lower down payment – that can be availed up to 100% of the entire car cost. The fast and easy process for securing the loan also requires minimum documentation. However, it does come with the downside of higher interest rates.

These days, banks can also do 100% finance for the used cars depending on the age, make and model. However, on the positive side, this secured loan offers you lower interest rates as compared to a personal loan. A car loan also comes with the advantage of varied repayment options such as a balloon payment, which may help you with the better cashflow by minimizing the loan repayments during the term.

DISCLAIMER- Please see a speacialist for more details as balloons are subject to approval by the lender. Car loans are equally quicker these days if you are buying the car from a dealer. The process may be slightly longer is you are buying from a private seller but A secured finance will still come at a far more attractive rate compared to the unsecured finance- depending on lender and overall profile of the applicant


Commandment 5 - Should I Buy From A Dealer Or A Private Seller?


private seller vs dealer.png


Before you decide on which option to settle for, here is a look at the Pros and Cons.


Pros Buying From A Dealership vs Private Sale



Cons Buying From A Dealership




 After going through the entire list, the decision might seem a bit overwhelming. Therefore weigh each factor against your current circumstances -- your budget, time in hand, and the validity of the seller.

Do not go by your whims or settle on a heart-over-mind decision. Always remember that, failure to pay the monthly instalment will put a black spot in your credit history -- labelling you as a risky borrower. Therefore, abide by your financial health; always.


The Bottomline

I understand, that scrutinising every offer and deciphering every jargon in the financial domain is a strenuous task. But do not neglect the necessary homework. Get an idea about what a prime ‘financing a used car’ deal actually looks like.

Take your time, understand every term, and read the fine print before signing on the dotted line.


Whenever in doubt, it is always recommended to seek counsel and advice from your accountant.

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