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Everything you need to know about car loans

So you’ve decided to buy yourself a car - congratulations! The next step for many Australians is finding car finance that suits their needs. Fortunately, RateCity compares a wide range of low interest and flexible car loans for a variety of borrowers. The next step on your car loan comparison journey is asking yourself the following questions:

What is a car loan?

A car loan is a loan that you can use only for purchasing a vehicle, such as a car, motorbike, van, truck or campervan. Car loans generally range from $5,000 to $100,000 and have loan terms lasting from one to 10 years.

When you take out a car loan, you not only have to repay the lump sum (or principal) you borrowed, you also have to pay interest (which is the price you pay to ‘buy’ the lump sum). This interest is a percentage of however much of your loan is still outstanding.

How much can I borrow with a car loan?

If you already know what car you want, then you should only need to borrow the value of that car. You could possibly add a little more to your car loan to cover extra costs such as insurance, but the less you borrow, the smaller your monthly repayments, and the more money you will save in interest and fees.

The other option is to calculate the maximum car loan total you can afford to repay, then go car shopping with this budget in mind. But take care not to blow your entire budget on a more luxurious vehicle than you need. Choose a car with your head, not your heart, and you could ultimately enjoy a more affordable deal. 

What should I consider when buying a car?

  • Size – small, medium or large?
  • Transmission – automatic or manual?
  • Use – city or country?
  • Efficiency – how many kilometres per litre?
  • Appearance – does it suit my personality?
  • Space – how much leg room and storage capacity?
  • Safety – what will happen in a crash?
  • Technology – basic or advanced?
  • Performance – standard or superior?
  • Resale value – how hard will it be to resell?

What is a normal interest rate on a car loan?

Unfortunately, there is no ‘normal’ interest rate on a car loan, because rates move up and down all the time in response to market conditions and competition. Generally, if the Reserve Bank of Australia (RBA) increases or decreases the official cash rate, car loan lenders will increase or decrease their own interest rates.

Car loan lenders also change their interest rates independent of the RBA. Sometimes, they might independently lower rates to entice more customers. At other times, they might independently increase rates to cash in on their existing customers – to earn more money from the same people.

What is the best interest rate for a car loan?

Just as there’s no ‘normal’ interest rate on a car loan, there’s also no ‘best’ interest rate for a car loan. Why? There are two reasons:

  1. The best interest rate will differ from person to person, depending on their unique financial circumstances
  2. The car loan market changes all the time, so no one product can have the best rate forever

Lenders offer different interest rates depending on loan size, loan term, deposit size, security, car type and various other variables. So a lender might offer one interest rate for a $10,000 unsecured loan for a used car and a different rate for a $25,000 secured loan for a new car.

Another point worth mentioning is that your financial position will change from time to time. For example, the last time you bought a car, you might have needed that first ($10,000 unsecured) loan, whereas this time you might need the second loan. So what was best for you might not be best for you now.

Furthermore, lenders often change their car loan interest rates – sometimes due to market forces and sometimes due to the pressures of competition. What that means is that whatever product offers the best interest rate today might not offer the best interest rate tomorrow.

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How should I handle my car loan repayments?

When comparing car loans, try to get an approximate idea of how much you can afford to pay back each month. You can then use this figure to help you determine which car loans may be the best for you.

Remember that if you opt for a car loan with a variable interest rate, your repayments could go up or down from month to month, so if you’re planning your budget in advance, it’s worth leaving a bit of wiggle room just in case of surprise increases to car loan rates.

If you’d rather not risk being left out of pocket by car finance rate rises, you might consider a fixed-rate car loan, where the interest rate stays the same for the lifetime of the loan. While you won’t enjoy savings from interest rate cuts, at least you’ll enjoy the security of knowing exactly how much you’ll be paying per month.

If you want to lower your monthly repayments, you could opt for a longer loan with smaller instalments. Just keep in mind that if you choose a longer car loan term, you’ll ultimately pay more in interest over the lifetime of the loan, costing you more in total than if you’d made larger monthly repayments over a shorter period.

It’s also worth remembering that for many car loans, you won’t just be paying interest, but additional fees and charges as well, such as application fees and ongoing fees. To get a better idea of which car loans are likely to cost you more in total, check out their ‘comparison rates’.

Comparison rates combine the advertised car loan interest rates with their standard fees and charges, and express them as a percentage. Remember that a car loan’s comparison rate might not include its every cost or account for its extra features, so use the comparison rate a guideline and not as a decision-maker. 

How do I take out a car loan?

  1. Calculate how much you can afford to repay each month
  2. Calculate how much you can borrow
  3. Decide what car you want
  4. Choose between a new car and a used car
  5. Calculate how much of a deposit you will need
  6. Choose between a shorter loan term and a longer loan term
  7. Choose between weekly, fortnightly and monthly repayments
  8. Choose between a secured car loan and an unsecured car loan
  9. Choose between a variable-rate loan and a fixed-rate loan
  10. Decide whether to get the car loan through a comparison site, finance broker, car dealer or direct-to-lender  

Secured vs unsecured car loans

Many car loans are ‘secured’, which means that if you can’t make your repayments, the lender can recover its losses by repossessing an asset of yours – usually the car you’re buying. These loans often have lower interest rates, as they represent less risk to the lender, though some lenders only offer secured loans for cars that fit certain criteria.

If the vehicle you’re looking at isn’t eligible for a secured loan, some lenders offer ‘unsecured’ car loans, where your shiny new (or used) vehicle is not at risk of being repossessed, but you may have to pay higher car loan rates instead.

Car loans for new cars vs old cars

While you may need to pay more up front for a brand new car, lenders tend to consider new cars to be less of a financial risk than used cars, because they’re of a higher quality and enjoy a higher resale value. So you may enjoy a more competitive interest rate on a car loan for a new car.

Conversely, a car loan for a used car might attract a higher interest rate, because the loan is seen as a greater risk. That said, used cars are often cheaper than new cars and tend to depreciate at a slower rate, balancing the scales somewhat when it comes to car financing.

Different lenders use different criteria to definite ‘new’ and ‘used’. Some may use two years as a benchmark – any younger is new and any older is used. Some lenders also have a maximum age for vehicles they’ll offer loans for (e.g. five years), as vehicles older than this are considered too high-risk. 

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Can I pay off my car loan early?

If you find yourself with some extra money available, you might be able to add that extra cash onto your car loan. By making higher or additional repayments, you can get closer to exiting your car loan early, and reduce the total amount of interest you need to pay.

Just remember that some lenders charge fees for making additional payments and/or making an early exit from your loan, to make up for some of the lost interest. These fees and charges tend to be more common for fixed-rate car loans where your repayments are scheduled well in advance, but always check first before taking out a car loan.

A ‘redraw facility’ is another handy feature to keep an eye out for if you’re thinking of adding extra money onto your car loan. If you find yourself in a tight financial spot, a redraw facility will allow you to reclaim any extra money you’ve paid onto your car loan, freeing up your car financing to cover unexpected expenses.

This extra flexibility can allow you to pay extra towards your car loan with confidence, as you’ll be able to access these funds again if you really need them. Just check your lender’s terms and conditions, in case there are restrictions on how the redraw facility can be used.

Do I need a deposit for a car loan?

If you have your eye on a particular car but don’t have enough money for a full deposit, it doesn’t mean that vehicle is out of reach. Some lenders offer car loans with a high loan-to-value ratio (LVR), where you pay a smaller deposit and borrow a greater percentage of the car’s value.

Some lenders also offer 100 per cent car loans, where you pay no deposit and instead borrow the full value of the car. These offers typically involve higher interest rates due to the increased risk to the lender, so check whether you can afford the repayments to determine if a 100 per cent car loan is right for you.

What should I look for when comparing car loans?

When making a car loan comparison, the best car loan for you is one that not only has the features you want, but is also one you can afford. So do your sums with loan sizes and interest rates before signing on the dotted line.

By comparing the car loan offers at RateCity, you should soon be able to narrow down your car financing options to just the car loans offering the terms that best suit your needs. That way, you can be confident that the loan you take out is just as good as the car you buy.

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FAQs

There are four different ways you can get a car loan. You can go straight to a lender. You can get a finance broker to organise a car loan for you. You can get ‘dealer finance’ – which is when the car dealer organises a car loan for you. Or you can organise your own car loan through a comparison website, like RateCity.

Whichever method you choose, you will need to provide proof of identification, proof of income and proof of savings. So you may be asked for any combination of passport, driver’s licence, bank statements, payslips, tax returns and utility bills. You might also be asked to provide proof of insurance.

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