Three ways to pay off your car loan

Three ways to pay off your car loan
About this post

Australians have always had a love affair with the car, depsite a growing trend towards public transport options, especially for environmental reasons.  But nothing quite stacks up to the convience of a car - particularly when you have kids and vast amounts of shopping and dropping off to do.

According to the ABS, car purchases are at their highest rate ever right now. So, for those of you who'll be getting some new wheels, how are you planning on financing it?

1. Borrow the traditional way

Many Aussies will take out a car loan in order to purchase a new vehicle, whether they're looking at a compact hatchback or larger family vehicle. 

Just as with a home loan, it's important to complete a comparison of various products on the market. Interest rates for personal loans vary, and like home loans, there are both variable- and fixed-rate options. If the Reserve Bank of Australia board changes the official cash rate (OCR) this can affect the interest rates for variable-rate loans.

Anyone wanting certainty about their car loan repayment amounts may wish to take out a fixed-rate personal loan.

Secondly, there are both secured and unsecured loans available. A lender who registers a security interest over an asset has recourse if the borrower doesn't pay the loan back. Accordingly, these "secured" loans are less risky for the lender, so interest rates may be more favourable.

2. Add it to the home loan and escalate repayments

Using a home loan's redraw facility is an alternative to taking out a personal loan — and interest rates are generally lower.

RateCity research shows that a five-year, $30,000 secured car loan on a rate of 8 per cent would lead to $6,497 in interest repayments.

By contrast, a property owner who uses their home loan redraw facility on a home loan rate of 5.37 percent will pay just $5,699 in interest over the same period.

3. Redraw and pay it off over time

There's a third option, but it's potentially a trap.

"Using the redraw facility on a home loan offers a lower interest rate than most personal loan/car loan options, but you must have the discipline to make higher repayments in order to clear the debt as soon as possible to avoid a hefty interest bill," RateCity said.

An homeowner who takes 25 years to pay off $40,000 from their redraw facility at the average home loan rate of 5.37 percent will pay a whopping $24,573 in interest.

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