With the cost of living and interest rates rising, managing our finances has become increasingly crucial for many households. Inflation was at 6.8% in April 2023, and the cost of day-to-day necessities continue to increase. Even so, that didn’t stop Aussie car sales either, soaring to an all-time May sales record last month*. So if you’re in the market for a car, it’s more important than ever to understand your options.

Buying a new or used car still takes careful consideration, because let’s face it, it’s still a significant purchase. So what are your options? You can choose to buy outright with cash, or use car finance. While you might hesitate to take out a loan with interest rates rising, benefits such as fixed rates and higher buying power can make car finance a smart financial decision. To make an informed choice, we’re here to help you understand your options around car finance.

From the top: How does car finance work?

Car finance is similar to other loans, which allows you to borrow a certain amount of money to buy a new or used car. In the same way that personal loans or home loans do, car finance is made up of an interest rate, repayment period, and other fees and charges. A car loan is also securitised against the car as an underlying asset, very much like a home loan being secured by the property itself. Your regular repayments (monthly, fortnightly, or weekly) on the car depends on these components, and factors like cash deposits and balloon payments.

Getting car finance typically looks like this: After choosing a car you’ll compare finance rates and quotes. These could be from a bank, financier of your own choice, or a financier partnered with the dealership you’re buying from. From there, you’ll just need to submit an application for approval on the loan of your choice. Alternatively, you could also get in touch with a lender to get pre-approved for a certain amount and choose your car within that budget.

Once you’ve settled your finance details and contract, your lender will pay the dealership or seller you’re buying the car from on your behalf. From there, you’ll make regular repayments over a period of typically 2-7 years.

Why choose car finance over paying upfront with cash?

Now that’s the basics covered, let’s take a look at some of the advantages you may be able to benefit from by going with car finance.

1. More buying power

By combining savings and finance on your purchase, you’re typically able to increase your buying power compared to paying purely with cash. Finance can enable you to buy a car that’s of a higher trim level or one with more safety and tech features that you may not be looking at on a cash budget. “Features such as safety tech are always a favourite among families,” adds Simon Bozzi, Carma Director of Customer Finance, “Advanced tech like wireless charging or remote tailgate could also be something to consider on higher trim models, and that’s where finance can get you to.”

2. Keep your savings for another day

Saving up to buy a car can sometimes take a long time, while car finance is a quicker way to get the full amount on a car and pay it off over a period of time. Where it might feel daunting to spend a lump sum on the car, with finance you can hold onto your savings for emergencies, holidays, or just simply better budgeting. Being able to pay off your car bit by bit instead of taking out a large sum out of your account can be especially helpful in today’s economic climate. “Carma finance interest rates are also fixed and you can structure your loan to meet your needs,” says Simon, “so you’ll know exactly what your repayments are throughout your repayment period to better manage your budget”.

3. Build your credit score

Your credit score is one of the factors that determines whether you are able to borrow money to buy a house, car, or business purchases. Getting better interest rates, better loan terms, easier credit approvals are just some of the benefits that make building a good credit score so important.

There are a few ways to build creditworthiness, and car finance can help you with that. For first-time borrowers in particular, many of our finance partners have options for borrowers who are just beginning their credit journey. “Making your repayments on time and staying on top of your finances shows responsible credit habits,” Simon offers, “This credit history is what lenders will look at when you apply for a credit card or mortgage, so maintaining a healthy credit score is key.”

Top tips to get the car finance that best suits you

It’s a whole world of cars and interest rates out there, with plenty of choice to shop around. To make an informed decision and get the most value out of your finance, we’ve put together some tips and advice:

Low advertised rates: too good to be true?

Low interest rates may grab your attention, but you might end up getting let down. “Advertised rates are usually a minimum rate or a range which may also lock you in with the type of car you buy, its age, or trim level,” says Simon, “That’s why we’ll always provide you control over your choice with tailored options across multiple lenders.”

Simon also adds “Interest rates are just one part of the whole equation too. Upfront fees, monthly fees, and early termination charges are all things to be aware of when considering offers in the market.”

Shop around for quotes

Getting a finance quote typically involves a ‘soft touch’ process that doesn’t affect your credit score, so you’re free to shop around for quotes to find the best deal. Different lenders will offer different rates based on your circumstances, and sometimes even the lowest rates might not even be flexible enough to meet your needs. “Where some dealers will only offer one quote, Carma will always provide three quotes from our carefully selected lending partners, Plenti, Wisr, and Automotive Finance,” adds Simon, “We’ll also work with you to provide all the information you need to choose the right option that best suits you”.

Knowing what to expect during the car finance process is really the first step to getting your car with the confidence that you’ve got great value out of your finance. So with all our advice and research, you’ll be ready to go.