Car finance options explained
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Car finance types | Secured and unsecured loans | Chattel mortgages | Novated leases |
Choosing the right option
Whether you're buying a car for personal use, business or through your employer, there are several ways to finance it. Each option comes with its own features, benefits and considerations.
This guide breaks down three common car finance types – secured and unsecured loans, chattel mortgages and novated leases - to help you understand how each option works in practice and choose what’s right for you.
A simple way to think about it is that each option suits a different situation, depending on how you earn, how you use the car and how much flexibility you want.
Comparing car finance types
Here’s a quick overview of how each option stacks up:
| Finance type | Ownership during term | Security required | Could be suitable for | Key benefits |
|---|---|---|---|---|
| Secured loan | You own the car | Yes (the car) | Most personal buyers | Lower interest rates, higher limits |
| Unsecured loan | You own the car | No | Buyers with strong credit | No asset tied to loan |
| Chattel mortgage | You own the car | Yes (the car) | Business owners, sole traders | Potential tax benefits, flexible terms |
| Novated lease | You lease the car | No | Employees with salary packaging | Potential tax savings, bundled running costs, salary packaging benefits |
Secured and unsecured loans
These are the most common types of car loans for personal buyers. The main difference is whether the loan is backed by an asset.
Secured loans
With a secured loan, the car you’re buying is usually used as collateral. This reduces the lender’s risk, which can lead to lower interest rates, longer loan terms and higher borrowing limits.
In practical terms, this often means lower repayments compared to an unsecured loan.
If you’re buying a new or newer car and want to keep repayments manageable, this could be a good option.
Because the vehicle is used as security, the lender may have the right to repossess and sell it if you don’t meet your repayment obligations under the loan agreement.
Unsecured loans
Chattel mortgages
A chattel mortgage is a type of business car loan designed for people who use their vehicle primarily for work, such as sole traders or small business owners.
This can be a good option if you rely on your car for business and want to own it from the start.
How it works
The lender provides funds to buy the car, which is then used as security. You own the car from day one, and the lender registers their interest until the loan is repaid.
Once the loan is paid off, the car is fully yours with no remaining finance attached.
Possible benefits
- Lower interest rates compared to unsecured loans
- Flexible repayment options, including balloon payments
- Potential tax benefits, such as claiming depreciation and interest costs
- Potential GST credits may apply if your business is registered for goods and services tax
Things to consider
Chattel mortgages are not covered by consumer credit laws in the same way as personal loans.
This makes it important to get advice so you understand how it fits your business situation.
Novated leases
A novated lease is a salary packaging arrangement through your employer that allows you to lease a car.
It’s often used by employees who want to bundle their car costs into one regular payment and potentially reduce tax.
It involves three parties: you, your employer and a finance provider.
How it works
Your employer makes lease repayments using your pre-tax salary. This may reduce your taxable income, depending on your circumstances.
You don’t own the car during the lease term. At the end, you can choose to pay the remaining value, extend the lease or upgrade. Some lease providers may also offer an option to hand back the vehicle.
Think of it as paying to use the car over time, rather than buying it outright upfront. It could suit someone who wants predictable costs and plans to upgrade their car every few years.
What happens at the end of a novated lease?
At the end of the lease term, you generally have three options:
- pay the remaining value to take ownership
- extend or refinance the lease
- upgrade to a new car and start a new lease
The right choice usually comes down to how long you want to keep the car and what it’s worth at the time.
Types of novated leases
- Fully maintained: Includes running costs like fuel, servicing, insurance and registration
- Non-maintained: Covers only the lease repayments and you pay running costs separately
Fully maintained options can make budgeting easier, as most costs are bundled together.
Possible benefits
- Potential tax savings through salary sacrifice
- No GST on the car purchase or running costs
- Simplified budgeting with one regular payment
- Easier upgrades at the end of the lease
Potential tax savings depend on your individual tax position and circumstances.
Things to consider
- You may need to pay the remaining value to keep the car
- Fees and fringe benefits tax may apply
- If you change jobs, you may need to pay out the lease or transfer it
- Not available to self-employed individuals
It’s worth thinking about how stable your employment is before choosing this option. This matters because your lease is tied to your employer, so changes in your job can affect your arrangement.
Novated lease vs buying a car outright
A novated lease works differently to a traditional car loan. Here’s a simple comparison:
| Buying with a loan | Novated lease |
|---|---|
| You own the car | You lease the car during the term |
| Repayments are made from after-tax income | Repayments are typically made from pre-tax salary |
| Running costs are paid separately | Running costs can be bundled into one payment |
A novated lease can simplify budgeting, but it’s important to consider the total cost over time and how it fits your employment situation.
Choosing the right option for you
Here’s a quick overview to help match each finance type to your individual situation:
Personal use:
Business use:
Employee salary packaging:
A good starting point is to think about how you’ll use the car, then work backwards to the right type of finance.
You might also want to consider how long you plan to keep the car and how predictable you want your costs to be.
Each option has its own benefits, so it’s worth considering your income, employment type, tax position and long-term plans before deciding.
Planning your next step
Before choosing a finance option, it helps to look at the full picture.
You can explore your options and estimate what your repayments might look like based on different loan types and terms. This gives you a clearer idea of what you can comfortably afford, not just what you can borrow.
Pepper Money offers a range of flexible car finance solutions. If you’re unsure which option is right for you, we can help you talk it through and compare your choices.
Contributor | Andrew Gamble, Head of Sales - Asset Finance
Andrew brings more than 20 years of experience in the finance industry. His strategic vision, leadership and his customer centric approach has contributed to the significant growth of Pepper Money's Asset Finance business.
Published by Pepper Money. Read our Editorial Policy to learn how we create and review content.
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