So you’ve decided to buy yourself a new car. Congratulations. The next step for many Australians is locating a car loan that suits their needs. Fortunately, RateCity compares a variety of low interest and flexible car loans for a variety of borrowers. The next step in the journey is asking yourself the following questions.
How much do you need to borrow?
If you’ve already done your research and know what car you want, then you should only need to borrow the value of that car – easy! You could possibly add a little more to your car loan to cover extra costs such as insurance, but generally speaking the less you choose to borrow, the smaller your monthly repayments, and the more money you ultimately 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. Just take care, and resist the temptation to blow your entire preapproved budget on a super-luxury vehicle if you ultimately don’t REALLY need it. Choose your car with your head, not your heart, and you could ultimately get a more affordable deal.
How much can you afford to pay back per month?
When comparing car loans, try to get an approximate idea of how much you can afford to pay back each month, and 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 interest rate rises.
If you’d rather not risk having rate rises leave you out of pocket, you might consider a fixed rate car loan, where the interest rate is set in advance and 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 confidence and security of knowing exactly how much money you’ll be paying per month, with no surprises.
If you want to keep your monthly repayments on the lower side, it’s possible to stretch out the length of your car loan, and pay back the balance in smaller instalments over a longer period of time. 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, likely 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, which combine their advertised interest rates with their standard fees and charges, and express them as a percentage. Remember that a car loan’s comparison rate doesn’t include its every cost, nor does it account for its extra features, so use the comparison rate a guideline and not as a decision-maker.
Can you use the car as security?
Many car loans are Secured Loans, where if for any reason you’re unable to make your repayments, the lender will 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, such as cars under a certain age, or particular vehicle models.
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 a higher interest rate instead.
Are you buying a new or used car?
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 (less wear and tear, plus newer technology means they’re more likely to last for longer), so you may enjoy a more competitive interest rate on a new car loan.
Because used cars are perceived as greater financial risks by lenders, you’ll likely pay more in interest for a used car loan. That said, used cars are often somewhat less expensive to buy than new cars, balancing the scales somewhat. Plus, the value of a used car tends to depreciate more slowly than a new car, so you should ultimately enjoy more value from your loan.
What counts as a “new” or “used” car for the purposes of car loans? Different lenders use different criteria – some may classify any car less than 2 years old as “new” and any older car as “used” and set their terms accordingly. Some lenders also have a maximum age for vehicles they’ll offer loans for (e.g. 5 years), as vehicles older than this are considered too high-risk.
Want to be able to pay off your car loan early?
If you find yourself with some extra money available, such as if you receive a bonus from work, a tax refund, or if an interest rate cut leaves you with a budget surplus this month, 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 be mindful 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 put any extra money you’ve paid onto your car loan back into your pocket, freeing up your finances to cover unexpected expenses. This extra flexibility can allow you to pay extra onto 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 you have a deposit ready?
If you have your eye on a particular car, but don’t have enough money saved up to make a full deposit on a car loan, it doesn’t mean that vehicle’s out of your 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% car loans, where you pay no deposit and instead borrow the full value of the car. These loans 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% car loan is the best choice for you.
Compare rates and find the best car loans for you
Remember, the best car loan for you is the one where you get the funds and the features you want, as well as repayments you can comfortably afford, and you get to drive away in your newly-purchased ride.
By comparing the car loan offers at RateCity, you should soon be able to narrow down your options to just the car loans offering the terms that best suit your needs.