What is a car loan calculator?
A car loan calculator is an online tool you can use to figure out how much you’d have to repay under different borrowing scenarios. RateCity’s car loan calculator lets you play around with the borrowing amount, interest rate, loan term and repayment frequency.
There are three things you’ll need to know to use RateCity’s car loan calculator:
- How much you plan to borrow – This is typically the value of the car you plan to buy, though some car loans can also include other expenses, such as insurance costs, fees and extended warranties, as part of the loan. Keep in mind that the more money you borrow, the longer it may take to pay back your car loan, and the more interest you'll likely be charged.
- The length of your car loan term – The shorter the term of your car loan, the sooner your car will be fully paid off and the less interest you’ll pay in total, even if your monthly repayments are higher. Lengthening your car loan term means making more repayments, each one for a smaller amount. This can help make your loan more affordable in the short term, though you’ll end up paying more interest in total by the end of the extended term.
- The interest rate you’d like to pay – While many of us would love a basic car loan with a low interest rate, these loans may also have more specific lending criteria, and thus may not be available to all borrowers. Some car loans with higher interest rates may offer more features and greater flexibility, which may provide greater value for money to the right borrower.
The best way to use a car loan calculator is to play around with different scenarios. So type in a range of borrowing amounts, loan terms, interest rates and repayment schedules. You might be surprised to discover how seemingly minor changes to the car loan calculator can result in significant changes to your repayment instalments.
What is a car loan?
A car loan is a loan that is specifically used to buy a vehicle, such as a car, van, motorbike or truck.
There are two different types of interest – variable-rate interest and fixed-rate interest.
With a variable-rate car loan, the lender is entitled to change the interest rate at any time during the life of your loan. For example, your loan might start at 7.50 per cent; six months later, it might increase to 7.60 per cent; three months after that, it might fall to 7.45 per cent.
With a fixed-rate car loan, the lender cannot change the interest rate during the fixed-rate period. For example, if you take out a five-year loan that is fixed at 7.50 per cent, you can be certain that the interest rate will remain steady during those five years. However, once the fixed-rate period ends, your loan might automatically be reclassified as a variable-rate loan. In that case, you would be charged whatever the variable rate happened to be, whether it was lower or higher.
The great thing about a car loan calculator is that it allows you to test different repayment scenarios, so you can see how your finances would be affected by a change in interest rates.
What is a secured car loan?
With a secured car loan, you use your vehicle as collateral to guarantee the loan. If you default on your repayments, your car could be repossessed to cover the lender’s losses. In that case, your car might sell for less than the outstanding debt – so to cover themselves, some lenders will provide secured car loans only for new cars or particular used car models under a certain age. That way, the resale price is likely to exceed any outstanding debt. You can use a car loan calculator to work out what your repayments might look like if you took out a secured car loan.
What is an unsecured car loan?
With an unsecured car loan, you don’t have to provide any collateral to the lender. However, unsecured car loans generally have higher interest rates than secured car loans, because lenders regard them as riskier. To ensure you don't take out a car loan you can't afford, punch some numbers into a car loan calculator and see if you can meet the repayments.
How do I get a car loan?
There are three different ways you can get a car loan:
- Let the dealer arrange your finance
- Approach a lender directly
- Go through a finance broker
Letting your car dealer organise your loan for you is the most convenient option – but it’s also likely to be the least beneficial. That’s because dealer finance is often less flexible and more expensive. You might also feel pressured to make big decisions on the spot.
Approaching a lender directly will allow you to cut out the middleman (i.e. the car dealer). The key, though, is to choose the right lender, because the lender will only discuss its own products. Comparison websites like RateCity make it easier for you to narrow down your options.
The third option is to go through a finance broker, who will recommend a product to you from someone on his panel of lenders. Brokers offer several positives – they generally don’t charge for their services, they offer expert advice and they give you access to a range of options. The negative, though, is that brokers will only discuss lenders on their panel – and brokers are highly unlikely to have every lender on their panel.
Whatever option you choose, you should first use a car loan calculator so you're better informed before you start discussing options.
What documents do I need to get a car loan?
Different lenders have different requirements, but here are the documents you’ll probably be asked to provide:
- Proof of identity (100 points of identification)
- Proof of income (utility bill, council notice)
- Proof of savings (payslips, bank statements, tax return)
- Proof of liabilities (bank statements, investment documents)
- Proof of insurance (insurance documents)
How much can I borrow with a car loan?
Lenders don’t hand out money unless they’re confident the loan will be repaid. So one way to think of borrowing capacity is to imagine that it starts at $1 for each person and continues rising until the lender believes it has reached that particular person’s limit. For one person, that might be $10,000; for another, that might be $50,000.
These things are good for borrowing capacity:
- Higher incomes
- Bigger asset bases
- Lower spending habits
- Strong credit history
These things are bad for borrowing capacity:
- Lower incomes
- Smaller asset bases
- Higher spending habits
- Weaker credit history
To work out your income and spending, check your pay slips, bank statements and credit card statements. If your spending exceeds your income, you won’t qualify for a car loan. If your income exceeds your spending, you might qualify for a car loan.
The ‘gap’ between your income and spending is what you would use to repay the car loan. Once you know what that number is, you can use a car loan calculator to get a rough idea of how much you might be able to borrow.
Will I be penalised if I repay my car loan early?
Some lenders will slug you with early repayment charges if you pay off your car loan ahead of schedule. However, some lenders won’t. So this is something you should check before signing up for a car loan. Don't forget to use a car loan calculator before applying for a loan, because this will help you understand your repayment capacity.
What is a balloon payment?
A balloon payment is a one-off lump sum you pay at the end of a loan. Some lenders will give you the option of making lower repayments on your car loan in return for making a balloon payment. Generally, consumers who take out car loans with balloon payments end up paying more interest over the life of their loan than consumers who choose a loan with higher repayments but no balloon payment.
Should I get a car loan through a dealer?
The big advantage of dealer finance is convenience. Instead of having to visit a car dealer and a lender or broker, consumers who opt for dealer finance only have to deal with one party.
Convenience, though, comes at a cost. Consumers who take out dealer finance often get less flexible car loans and end up paying more over the life of the loan, compared with consumers who work directly with a lender or take out a loan through a finance broker.
Another disadvantage of dealer finance is that often applies to a more limited range of makes and models than are available to consumers who take out car loans via a lender or broker.
Make sure you punch some numbers into a car loan calculator before you sign up for dealer finance. That way, you won't lock yourself into a loan that you can't afford.
What kind of car should I buy?
Before you take out a loan to finance your car purchase, you need to figure out what vehicle you want to purchase. And before you choose one of the thousands of makes and models on offer, you should consider whether you want a new or used car.
There are four main reasons why some buyers prefer new cars to used cars:
- They come with a warranty
- They have the latest technology
- They’re more fuel-efficient
- They’re less likely to suffer mechanical problems
But used cars also have four advantages over new cars:
- They’re cheaper
- They depreciate more slowly
- You have more room for negotiation
- You have a greater range of models to choose from
Whatever type of car you decide to buy, make sure you use a car loan calculator to explore different repayment scenarios.
What should I consider when comparing car loans?
Consider the benefits of any extra features attached to your car loan, as you might have to pay extra for features you don’t need. These extras could include insurance options, extended warranties or shortfall cover.
Watch out for fees. Numerous lenders charge establishment fees to cover the creation of your loan documentation. Ongoing fees may also be charged from month to month, in addition to the interest, which can make your loan significantly more expensive in the long run.
To get a better idea of the true cost of different car loans, look at each loan’s comparison rate, which combines the advertised interest rate with the lender’s standard fees and charges. Remember, though, that some loans include non-standard fees and charges that aren’t included in the comparison rate.
If you’d like to be able to pay off your car loan ahead of schedule and reduce the total interest you pay, check whether your lender charges fees for making extra repayments or for exiting the loan early, as these can make this option less affordable.
A car loan with a redraw facility can be helpful if you’re trying to pay your car loan off ahead of time but are concerned about committing too much of your money to the loan. Once you’re ahead of your repayment schedule, a redraw facility can be used to withdraw money from your car loan’s surplus balance, which can be a handy option to have available in case of emergencies.
If you’re buying a car, it’s important to organise a report from the Personal Property Securities Register (PPSR). Formerly known as a REVS check, this report will determine whether the vehicle is being sold with a financial encumbrance (money owed by a previous owner). You can organise one of these reports for yourself. Some lenders will offer to do this check on your behalf, although they might charge a fee for the service.
Finally, don't forget to use a car loan calculator, so you can understand how different repayment scenarios would affect your financial position.