Car finance, explained: how it works, what it costs, how much you can borrow

Summary:

This guide breaks down how car finance works in plain language, so you can walk into any dealership knowing what a fair deal looks like.

• Most car loans are secured, where the car is the security, so the rate is usually lower than an unsecured loan.
• New cars can often be financed with no deposit, while older used cars may need one and can run into lender age limits.
• The comparison rate, not the headline rate, shows the real cost because it folds in fees, and a longer term lowers your repayment but costs more interest overall.
• Used cars usually carry slightly higher rates and shorter maximum terms than new cars.
• Pre-approval sets your real budget before you shop and gives you room to negotiate, though it is not a guarantee of final approval.
• A broker compares many lenders in a single credit enquiry, while dealer finance can quietly load add-ons into the price you borrow against.

Buying a car is exciting. Working out the car finance behind it is often the part that feels confusing, especially if it is your first loan. What does a lender actually look at? How much can you borrow? Will the rate you are shown be the rate you get? This guide answers those questions in plain English: how car finance works, what it costs, how much you might borrow, and how to tell a fair deal from a dressed-up one. Every term is explained as we go.

_____________________________________________________________________________________________________________________________________

How does car finance actually work?

Car finance is a loan you use to buy a vehicle and repay over a set term, usually one to seven years, in regular instalments of principal plus interest. Most car loans are secured, meaning the car itself is the security. As MoneySmart explains, a secured loan lets the lender take and sell the car if you fall behind.

Secured car loans

A secured car loan uses the car as collateral, which is another word for security. Because the lender has that safety net, secured loans usually come with lower interest rates. This is the most common way Australians finance a car.

Unsecured car loans

An unsecured car loan (a type of personal loan) does not use the car as security. The rate is usually higher because the lender takes on more risk, but it can suit an older vehicle, a private sale, or a situation where you would rather not tie the loan to the car. If you want the full breakdown, the Australian Government’s MoneySmart car loans page sets out both options clearly.

_____________________________________________________________________________________________________________________________________

How much can you borrow, and do you need a deposit?

How much you can borrow for a car depends on your income, your regular expenses, your credit history, and the car you are buying. Lenders work out what you can comfortably repay under responsible lending rules, then set your limit. A new car can often be financed with no deposit, while an older used car may need one.

The car’s value also matters through something lenders call the loan-to-value ratio (LVR), which is simply the loan amount measured against the car’s value. Most lenders will lend up to around 120 to 130% of a car’s value, leaving a little room for on-road costs. Push past that and the loan can be knocked back or repriced, which is exactly where dealer add-ons can catch buyers out.

A real example: when the invoice was hiding the answer

A customer recently came to us with a finance figure that looked high for the car they were buying. When the lender compared the car’s value against the price on the invoice, the LVR came out at 150%, well above what most lenders allow. We asked for the dealer invoice and pulled it apart line by line. It included a delivery fee of more than $1,000, several insurance products, the usual window tint and paint protection, and a car priced a couple of thousand dollars above comparable vehicles on the market. Once it was broken down, the customer found the same car about $2,000 cheaper elsewhere, dropped the insurance products they did not want, and the LVR came back to 125%. That alone qualified them for a lower rate and better terms.

Want a rough idea of your repayments before you go car shopping? Our car loan repayment calculator gives you a quick estimate in a couple of minutes. No application, no credit check.

_____________________________________________________________________________________________________________________________________

What will car finance cost, and what is a comparison rate?

Your car finance cost comes down to the interest rate, the fees, and the loan term. MoneySmart describes the comparison rate as a single figure for the cost of a loan that includes the interest rate and fees. It is the number that lets you compare one loan against another honestly, not just on the headline rate.

Lenders set your actual rate based on the loan features you choose, the length of the loan, your credit score, and the car you are buying. A low advertised rate can still be an expensive loan once fees are counted, which is the whole reason the comparison rate exists.

The term matters just as much. A longer term lowers your regular repayment but adds interest over the life of the loan. The figures below are illustrative only. Say you borrow $30,000. Over five years you might pay roughly $5,600 in interest; stretch the same loan to seven years and you could pay closer to $8,000. Same car, same amount, about $2,400 more in interest, in exchange for a smaller repayment each month.

Comparison rate 7% p.a. based on $30,000 over 5 years. Warning: comparison rate is true only for the examples given and may not include all fees and charges.

On fees, it pays to know exactly what you are being charged. A car finance deal can include an establishment fee, a monthly account fee, and dealer add-ons built into the price. The Australian Securities and Investments Commission (ASIC) reviewed more than 350,000 car loans in 2026 and found fees varied widely, with some borrowers paying far more than others for similar loans. That is not a reason to avoid finance. It is a reason to ask for every fee in writing and check the comparison rate before you sign.

_____________________________________________________________________________________________________________________________________

New vs used car finance: what changes?

New and used car finance work the same way, but the numbers shift. A new car usually attracts the lowest rates, the longest available terms, and often a no-deposit option. A used car can carry a slightly higher rate and a shorter maximum term, because an older asset is worth less as security over time.

Age limits are the main thing to watch with used cars. Many lenders cap how old a vehicle can be at the end of the loan, so a ten-year-old car on a seven-year term may not fit a standard product. That does not close the door. A secured personal loan, where the car is still taken as security, can finance an older vehicle at a rate close to a newer one, which is often a better result than a short, high-repayment used-car product.

_____________________________________________________________________________________________________________________________________

Should you get pre-approved before you shop?

Yes, in most cases pre-approval is worth getting first. Pre-approval is a lender’s conditional agreement to lend you up to a set amount, based on your income and credit details. Think of it as a green light: you shop knowing your real number, and you negotiate from a stronger position because you can act like a cash buyer.

One honest caveat: pre-approval is not a guarantee of final approval, because the lender still verifies the car and your details before settlement. It also does not have to cost you a stack of credit enquiries. When you apply through a broker, we can check your options against many lenders while only touching your credit file once, rather than you applying to lender after lender and marking your file each time.

_____________________________________________________________________________________________________________________________________

Dealer finance, a broker, or your bank: which should you use?

You have three ways to finance a car: the dealership, your own bank, or a finance broker. Dealer finance is convenient but can bundle add-ons and a marked-up rate into one figure. A bank offers its own products only. A broker compares a panel of lenders to find the fit for your situation, not just the first option.

With our access to 50-plus lenders on our panel, we can line up the options that actually suit you and show you how they compare. We also speak often with people who started with an online-only lender’s instant quote and came to us still waiting for a call-back, or holding a headline rate that did not apply once their real details were assessed. In one recent case, a customer who had already tried several brokers was frustrated by slow, vague answers. Using our panel we found an option more than 2% lower and about $200 a month cheaper on repayments, with options back to them within a few hours.

Don’t stress about picking the perfect path on your own, though, because you will have your own dedicated lending specialist who can walk you through everything and make sure the finance genuinely works for your needs. With Fox Finance Group as your guide, you get access to a wide panel of lenders, clear jargon-free explanations, and a loan matched to your situation. If you are looking at refinancing a car loan you already have, the same comparison approach applies.

_____________________________________________________________________________________________________________________________________

Is car finance right for you right now?

Car finance suits you when a reliable vehicle matters more than waiting to save the full amount, and when the repayment fits comfortably inside your budget. It is worth a quick honest check before you commit.

Ask yourself:

• Can I comfortably cover the repayment alongside my other bills, in a normal month and a tight one?
• Do I know the total cost of the car, including on-road costs and any add-ons, not just the sticker price?
• Am I comparing the comparison rate across a few lenders, rather than signing the first offer?

If the repayment would stretch you thin, it is worth borrowing a little less or choosing a slightly cheaper car rather than committing to a payment that leaves no breathing room. A good broker will tell you that plainly. Responsible lending rules exist so a loan has to fit your situation, and you may be eligible for more options than you expect once your full picture is assessed.

_____________________________________________________________________________________________________________________________________

Ready to see your car finance options?

You have found the car, or you are close. Now it helps to see the finance clearly before you sign anything. We will compare our car loan options across the panel, break down every fee, and tell you where the genuine value sits for your situation.

Start your car loan application, or call our friendly team on 1300 665 906. It only takes a couple of minutes to see your options, with no impact on your credit score.