Signing a car loan feels final, and for the most part it is. But whether you can still get out depends on two things: which contract you signed, and whether the lender has paid out the money yet. The answer is very different an hour after signing compared with a week after you drove away.
The short answer: there is usually no simple change of mind period for the loan itself. Under the National Credit Code you can generally end a consumer credit contract by written notice until credit has been obtained under it. Once the loan has settled, your exit is paying it out, which can carry early termination charges. Separately, some states give a short cooling-off period on the car purchase contract when you buy from a dealer.
This is general information only, not legal or financial advice. If you are in a dispute, get free legal help or contact the bodies listed below.
Two contracts, two sets of rules for cancelling a car loan
When you buy a car on finance from a dealer you normally sign at least two documents. The sale contract is between you and the dealer and covers the car. The credit contract is between you and the lender and covers the money. State motor dealer laws mostly deal with the first. The National Credit Code, which is Schedule 1 to the National Consumer Credit Protection Act 2009, deals with the second, and also has rules for when the two are linked.
Moneysmart describes a cooling-off period as a time in which you can get out of a contract if you change your mind, and notes that the rules vary between states and territories and that details will be in the contract if one applies. So the first job is to work out which contract you want to leave.
Stage 1: before you sign anything
This is the only stage where walking away costs nothing. A short checklist:
- Read the credit contract, not just the repayment. Our guide to what happens between signing and settlement covers what the contract sets out.
- Ask about early exit costs now. Moneysmart says variable rate car loans usually do not have an early exit fee. Whatever the rate type, check whether the contract provides for early termination charges, because those can be added to a payout later. Our car loan fees guide lists the common charges.
- Make the purchase subject to finance. NSW Fair Trading advises that if you need a loan approved first, write into the sale contract that completing the purchase depends on getting the loan.
- Know the deposit terms. NSW Fair Trading warns that if you pay a deposit and sign a purchase order you are entering a legal contract, and if you change your mind the seller may be entitled to keep the deposit and ask for a cancellation fee.
- Do not sign a waiver you do not understand. In NSW the dealer cooling-off period can only be waived by signing a prescribed form (Form 12), according to NSW Fair Trading.
- Compare before you commit. It is easier to say no to dealer finance when you already have a quote. See dealer finance vs a broker vs your bank.
Stage 2: signed, but the loan has not settled
The credit contract. Section 21 of the National Credit Code says that although a credit contract has been made, the debtor may terminate it by written notice to the credit provider unless any credit has been obtained under the contract, or a card or other means of obtaining credit has been used to buy the goods. The credit provider can still keep or charge fees incurred before termination that would have been payable under the contract. In practice that means acting in writing, and quickly, before the lender pays the dealer or seller.
The sale contract, NSW. NSW Fair Trading says a one-day, waivable cooling-off period applies to new and used car purchases financed by a linked credit arrangement, meaning finance provided or facilitated by the dealer selling the car. It runs until 5pm on the next day the dealer is open. You end the contract by signed written notice to the dealer and pay the dealer $250 or 2% of the price, whichever is less. It does not apply to cars bought mainly for business use, auction sales, or where the dealer did not arrange the finance. A trade-in must be returned if you cool off.
The sale contract, Victoria. Consumer Affairs Victoria says you have three clear business days after signing a contract with a licensed motor car trader to change your mind, but you lose that right if you accept delivery of the car during the period. You must notify the dealer in writing, and the dealer can keep $100 or 1% of the purchase price, whichever is greater. There is no cooling-off period if the car is bought in a company name or is a commercial vehicle.
Other states and private sales. Check your own state or territory consumer affairs agency before relying on any cooling-off period. Moneysmart notes there is no cooling-off period for private sales.
If the finance falls through. Section 134 of the National Credit Code says that if you told the supplier you needed credit to pay, and you fail to obtain credit on reasonable terms after reasonable efforts, you are entitled to end the sale contract. The supplier can claim reasonable compensation for damage to goods supplied, and you are entitled to the return of money paid, subject to that.
Worked example: what cooling off could cost
Assumptions: a $30,000 car and a $10,000 car, each bought from a dealer and eligible for the state cooling-off period. These are illustrations of the published formulas only.
- NSW, $30,000 car: 2% is $600. The lesser of $250 and $600 is $250.
- NSW, $10,000 car: 2% is $200. The lesser of $250 and $200 is $200.
- Victoria, $30,000 car: 1% is $300. The greater of $100 and $300 is $300.
- Victoria, $10,000 car: 1% is $100. The greater of $100 and $100 is $100.
Stage 3: the loan has settled
Once the money has been paid out, the section 21 right is generally gone because credit has been obtained. What remains:
- You can pay the loan out at any time. Section 82 of the National Credit Code gives the debtor that right. The payout amount includes the amount of credit, interest and fees to the termination date, reasonable enforcement expenses, and early termination charges if the contract provides for them.
- You can ask for a payout figure in writing. Under section 83, the lender must give a written statement within 7 days of your written request. Our guide to paying out a car loan early explains how to read it.
- If the sale contract is later undone. Section 135 says that if a sale contract is rescinded or discharged under any law and there is a tied loan contract with a linked credit provider of the supplier, you are entitled to end the credit contract. It does not apply if the credit came from your own approach that was not induced by the supplier or credit provider. This is why finance arranged by the dealer is treated differently from a loan you organised yourself.
If you simply want a cheaper loan rather than no loan, refinancing is another way out, after allowing for any exit charges on the current contract.
If you were misled or the loan was unsuitable
- Dealer statements about the loan. Under section 128 of the National Credit Code, representations made by the dealer about a tied loan contract give you the same rights against the lender as if the lender had made them. Section 129 can also make a linked credit provider jointly liable with the dealer for loss from misrepresentation or breach of the sale contract, subject to defences.
- Responsible lending. Moneysmart says lenders cannot lend you money if they think you won't be able to make the repayments. If you believe a loan was unaffordable when it was approved, say so in your complaint.
- Complain to the business first, then AFCA. Moneysmart says to contact the business first and then make a formal written complaint. The Australian Financial Complaints Authority is a free, independent service that accepts complaints about credit, finance and loans from AFCA member firms, with time limits that apply.
- Struggling rather than mis-sold? Asking for a hardship variation may be more useful than trying to cancel. See how to ask your lender for hardship help.
Add-on insurance has its own exit
Insurance sold alongside the car is separate from the loan. Moneysmart says salespeople must wait four days after your car purchase before selling add-on insurance, and if they do not, you can cancel and get a full refund. Policies also have a cooling-off period, usually around 30 days. If a premium was added to your loan, cancelling it may reduce what you owe, so ask the lender to confirm the adjusted balance in writing.
