What is a used car loan?

To help purchase a ‘new’ set of wheels, used car loans are a type of personal loan that allows you to buy a pre-owned car within a certain age bracket, typically up to around seven years old. One of the primary reasons why lenders establish an age limit on used car loans is to reduce or avoid risks. Therefore banks and lenders must be certain that the used car you plan to purchase will have a life greater than the length of the loan. It’s important to note in Australia a vehicle is classified as either used or secondhand if it has previously been registered under the name of another driver.

Upon obtaining a used car loan, the lender will provide you with the money necessary to pay for the car's purchase price. Once the loan has been utilised to purchase a vehicle, you will be responsible for repaying the loan amount alongside interest in regular instalments (weekly, fortnightly or monthly) over an agreed upon length.

How to compare used car loans?

To ensure you are getting the best possible deal on a used car loan relevant to your financial position, there are a number of factors to consider when comparing loan products. These include:

1. Interest rates

As with any personal loan, interest rates play a crucial role in determining the amount of interest you will pay over the loan's term. Opting for a used car loan with a variable interest rate will mean the interest rate can fluctuate according to internal and external market factors, resulting in changes to your loan repayments. In contrast, a used car loan with fixed interest rate guarantees a consistent rate throughout your loan term, offering greater predictability in terms of repayments.

2. Secured vs unsecured

Secured car loans require the vehicle to serve as collateral, which can lead to lower interest rates, while unsecured loans do not require collateral and may result in higher interest rates and fees. When considering a used car loan, age and condition are two key factors that can determine eligibility for a secured or unsecured loan. If the bank or lender isn't confident that the value of the car is enough to secure the loan amount, you may need to offer up an alternative asset as security or opt for an unsecured loan.

3. Loan term

The loan term for car loans typically ranges from one to five years. However, the age of the used car you intend to purchase may alter the length of car loan term available. Lenders may impose an upper limit on the car’s age e.g. maximum 12 years old, meaning if your car is 7 years old now, your maximum loan term is 5 years.

Longer loan terms usually translate to lower repayments but result in higher interest charges over the life of the loan. On the other hand, shorter loan terms can result in more expensive repayments but less interest payable overall.

It can be helpful to calculate potential car loan repayments on various loan terms to determine the most suitable option before submitting an application. Check out InfoChoice’s car loan repayment calculator here.

Factors to consider before purchasing a used car

When purchasing a used car, it's important to keep in mind various expenses to ensure that you're prepared for the ongoing costs of car ownership. In addition to the initial purchase price, you will need to budget for expenses such as registration, petrol, tolls, ongoing maintenance and services, and insurance. It's essential to be aware that even if your car becomes undrivable or gets written off, you'll still be required to meet your repayments for the car loan. Therefore, it may be useful to consider insurance options that can protect you in such scenarios.

It's also crucial to consider the differences between purchasing a car from a dealership and a private seller. When dealing with private sales, it's essential to ensure that the car is not encumbered, among other things. Look for the car’s Vehicle Identification Number (VIN). You can check the history of the car against the databases in the state in which it’s registered or take advantage of the Australian Government’s PPSR check for only $2. This can help you determine whether the used car you intend to purchase has been stolen, encumbered by an outstanding loan, or even previously written-off.

Benefits and drawbacks of a used car loan


  • Affordable: Used car loans usually have lower interest rates and monthly payments than new car loans.

  • Better value: Used cars often have a lower sticker price than new cars, so you may get more value for your money.

  • Avoid depreciation: Used cars have already gone through the biggest depreciation hit, so the value of the car is less likely to drop significantly during the loan term.

  • Builds credit score and history: For those who use them responsibly and make their payments on time, a used car loan can be a good way to build credit history to help you establish a reputation as a trustworthy borrower.


  • Higher interest rates: While used car loans generally have lower interest rates than new car loans, they still tend to have higher interest rates than secured loans like home loans or other forms of personal loans.

  • Risk of repairs: Used cars may require more repairs and maintenance, which can add to the overall cost of ownership.

  • Limited choice: Your choice of make and model may be limited to what's available on the market at the time of your purchase.

  • Age and condition restrictions: Banks and lenders may have restrictions on the age and condition of the car you can purchase with a used car loan. If your car is older or a classic, you might need to opt for an unsecured personal loan.

  • Possible higher insurance costs: The insurance cost for a used car can be higher than a new car, especially if it has a higher value or is considered of greater risk to insure.