5 car loan traps to avoid

We all love our cars, and can talk endlessly about speed, torque and engines, but unfortunately many of us struggle to understand car loans.

Finance is often dry and confusing, so I get why people would rather watch paint dry than read up about car loans. Ignorance, however, is not bliss, because making a mistake with your car loan could cost you thousands of dollars.

Here are the five top mistakes people make:

Mistake 1: Getting the car before the loan

One trap excitable shoppers make is to buy the car before the loan. It’s like watching your new car crash in slow motion. If you fall short on the finance side, then you can kiss goodbye to any deposit you’ve laid down, and the car of your dreams.

Before you even hit the showroons, get your finances in order. A good first port of call is to check your credit history so you know there are no forgotten gremlins in that closet. Then start thinking about what type of loan you need and how you might want to finance it.

Even if nothing goes wrong, it’s never a good idea to rush something as important as a car loan. It’s important you have time to weigh up your options so you can choose the best loan, rather than be forced to settle for the fastest loan.

Mistake 2: Failing to use a car loan calculator

Don’t make the mistake of starting the finance process without first using a car loan calculator. Knowledge is power, so you want to make sure you’re fully armed before you do battle with lenders.

The beauty of a car loan calculator is that you can explore a range of repayment scenarios by punching in different borrowing amounts, interest rates, loan terms and repayment schedules. The more you understand your borrowing capacity, the less likely you’ll be shunted into a second-rate loan.

Mistake 3: Getting sucked in by advertised rates

One trap that’s easy to fall into is to focus on the ‘advertised rate’ rather than the ‘comparison rate’. The advertised rate doesn’t include fees; it’s an artificially low figure designed to entice unwary consumers. The comparison rate, though, does include fees. When it comes to car loan shopping, it really is your best ally.

A recent car loan comparison search on RateCity shows how falling into the advertised rate trap could cost you hundreds of dollars over the life of your loan.

Westpac Bank of Melbourne BCU
Advertised rate 8.49% 6.99% 5.90%
Comparison rate 9.67% 8.11% 6.82%
Difference 1.18% 1.12% 0.92%

Mistake 4: Ignoring the true cost of balloon payments

Balloon payments are another car loan trap that can ensnare unsuspecting borrowers. Just like with advertised rates, lenders use this sleight of hand to make a loan seem smaller than it is.

In this instance, the lender lures in the borrower by offering reduced monthly repayments. The catch, though, is that the borrower has to pay a one-off lump sum – or balloon payment – at the end of the loan. Generally, the total repayments on a loan with a balloon structure will be higher than a loan without.

Mistake 5: Waiving your right to make early repayments

Repaying a car loan as soon as possible seems like a sensible move and the sort of behaviour that ought to be encouraged. Unfortunately, some lenders will penalise you with an early repayment fee, designed specifically to recoup any interest lost as a result of the expedited loan term. It’s definitely a caveat you want to avoid if you think you might be able to get ahead on your loan. There’s nothing worse than paying extra for something just because you are early.

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Learn more about car loans

Where can I get a student car loan?

Student car loans are not a necessarily a product in and of themselves, but what you may be looking for is a guarantor car loan.

A guarantor car loan has a third-party act as a form of guarantee for your loan application, telling the bank or lender that if you default on your loan, someone will pay the loan repayments.

Going guarantor on a car loan is no new thing, and before internet-based credit scores, guarantor car loan applicants would apply for loans with a guarantor or property owner who could vouch for the person borrowing the loan.

To get a guarantor car loan, you’ll need someone willing to act as a guarantor for your car loan.

What is a secured car loan?

A secured car loan is a loan that is connected to a form of security, or collateral. Generally, the security for a car loan is the car itself. If you fail to repay the loan, the lender might seize your car, sell it and then use the proceeds to recover their debt.

How to find a great car loan

Historically, finding a great car loan would require excess research ranging from visiting an excess of websites or making phone calls, but technology has moved on. Using RateCity, Australia’s leading financial comparison service, you can check out great deals from a range of lenders on the one site.

To start, select the amount you want to borrow and the length of the loan, narrowing your search to show just fixed or variable interest rate results.

Once you’ve indicated your search criteria, you’ll see an immediate list of lenders, ranked by interest rate or application fees. You’ll also be able to view the monthly repayment amount for each result, helping you to know what you can afford.

Up to six products can be compared side-by-side, complete with more information about each car loan, giving you more information about your options.

When comparing your car loan options, it’s ideal to keep in mind some points find a great car loan for your needs. Consider the following:

  • Choosing a low interest car loan can reduce costs
  • Selecting an option with low fees and charges is ideal, because these can really add up
  • Be aware of penalties, such as early exit penalties if you pay off the loan sooner than expected
  • Consider the features that best suit your situation

There are many ways to ensure that you get a great car loan. Ultimately, you’ll end up with the best deal by doing your research and selecting the most suitable product for you.

What is a guarantor car loan?

A guarantor car loan is a type of loan that features a guarantor on the agreement. The guarantor is a third-party individual, often a friend or relative, who guarantees the loan will be repaid if the borrower defaults on the car loan.

Guarantor car loans are often geared at people who might otherwise struggle being accepted for a secured car loan when purchasing a vehicle. Some of the reasons might include a lack of credit history such as with a student or young person, if there’s bad credit, or age as a factor such as with pensioners.

How do you get a car loan?

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.

What are loan repayments?

Loan repayments are the regular payments you make to pay off your car loan. Loan repayments generally occur on a monthly basis, although many lenders will also give you the option of making fortnightly or weekly loan repayments.

What is a guarantor on a car loan?

A guarantor on a car loan is a third party, usually a relative or friend, who guarantees to meet the repayments of a loan for the purchase of a car, if the borrower/owner of the car defaults on the loan.

Guarantor car loans can be useful for people who would otherwise struggle in being accepted for credit to purchase a vehicle. These may include people with bad credit, students and young people who may have no credit history, as well as some pensioners.

Many lenders offer guarantor car loans, guarantor personal loans and guarantor home loans, because of the significantly reduced risk to the lender.

Can I get a discounted student car loan?

Being a student is tough enough, and while you might find the odd student discount on movies and technology, the same can’t be said about car loans, as you can’t really get a discounted student car loan.

Lenders make money on the interest and fees that they charge with loans, and the lowest interest and fees are given to the most reliable credit holders: people with excellent credit history.

As a student, you are unlikely to have enough on your credit report to warrant an excellent history. There are however, ways of getting a lower interest car loan if you can’t get an interest-free loan from the bank of mum and dad. One way of doing this may be through getting a guarantor car loan, which can get you a secured car loan by setting your parents up as guarantors.

What is a car loan calculator?

A car loan calculator is an online tool that helps consumers understand how much they would have to repay under different scenarios. Consumers can create these different scenarios by entering different borrowing amounts, interest rates, loan terms and repayment schedules into the car loan calculator.

What is the role of a guarantor on a car loan?

The role of a guarantor on a car loan is to meet repayments if the borrower of the loan were to default for any reason, such as not being able to afford it.

Useful for loan applicants with poor or bad credit, a guarantor makes it possible for these loans to be made secure, because there’s less risk for a lender overall.

Companies will likely give fair warning before they charge a guarantor for the costs of the loan, or before they repossess anything of the guarantor’s that may have been used as security. Still, it is important for a car loan guarantor to fully understand their responsibilities before they commit to the transaction.

I’ve been denied a car loan before; can I still get car finance?

Even if you’ve been denied a car loan before, you might still be able to get car finance. The key is to make the right application to the right lender.

The ‘right’ application is one that makes you look like an acceptable risk, which might include things like improving your credit score, increasing your savings rate and accumulating a bigger deposit.

The ‘right’ lender is one that deals with borrowers like you. For example, while some car loan lenders only deal with good credit borrowers, there are others that specialise in bad credit or poor credit borrowers.

What is an unsecured car loan?

An unsecured car loan is a loan that is not connected to a form of security, or collateral. Not all lenders provide unsecured car loans – and if they do, they generally charge higher interest rates for their unsecured car loans than their secured car loans.

What is a loan term?

The loan term is the amount of time the lender gives you to repay the car loan. For example, if you take out a $20,000 car loan with a five-year loan term, you would be expected to pay off the entire $20,000 (plus interest) within five years.

Can you get a car loan as a single mum?

Getting a car loan can be tricky if you’re a single mum, but it’s not impossible. Juggling your finances can be difficult, particularly if you are reliant on a sole income or on Centrelink payments (or a combination of the two), and having a car is a necessity rather than a luxury for many who have to look after children. Luckily there are specialist providers and services that can help you get the loan you’re after, even if you’re in a tough spot financially.