Does a car loan cover insurance?

Are you confused about whether a car loan will cover your insurance?

In short, whether the car loan covers your insurance or not is dependant upon a number of factors, including whether you buy used or new, and whether you take out an unsecured or secured loan.

According to ASIC, buying a car is one of the biggest single purchases Australians are likely to make, besides your home.

A car loan covers the total cost of purchasing your vehicle, which you agree to repay within a certain time period (the loan term). 

As with any large purchase, it’s crucial to shop around with a budget in mind. Identifying your ideal car can be a complex process, with hundreds of different models, makes and manufacturers to consider.

Depending upon the amount you borrow, your car loan can also be used to cover fees and insurances.

The costs many do not factor in

Before you get a car loan, new or used, it’s crucial that you look further than the advertised cost of the car itself.

You will pay interest on the amount you borrow, along with various fees and charges, and the onus is on you to determine exactly how much that is.

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When you create your car loan budget, you need to look at:

• Cost of the car
• Car insurance fees
• Registration fees / stamp duty tax
• Repairs and maintenance
• Fuel & road tolls
• Membership to roadside assistance organisations
• Monthly car loan repayments
• The loan term
• Car loan fees & interest

In other words, buyers and borrowers must consider the full costs of owning the car including the financial liabilities, before determining whether they can afford it.

You can as a borrower, opt to include your first year of car insurance fees in the initial loan, however it is unlikely you will be able to borrow the total insurance cost over the term of your loan.

With an average comprehensive car insurance policy costing between $800-$1200 per year, a five year loan term equates to between $4,000 to $6,000 extra to pay, on top of your loan. This could impact upon your ability to afford monthly repayments, and your application could be denied.

Does financing a car affect your car insurance?

Financing your car can affect your insurance in a number of ways, including the type of insurance you must purchase for your car and the premiums you pay.

If you’ve taken out a car loan, your lender will most likely stipulate the need for comprehensive insurance coverage. This is to ensure they protect their investment, just in case you default on your payments.

Types of Car Insurance

Compulsory third-party insurance (CTP), is a compulsory legal requirement. This covers you for any compensation that you might be liable for if you’re involved in an accident and your car hurts or kills other people.

Comprehensive insurance (which is different from CTP) covers you for damage to your vehicle or property, and damage you inflict on other people’s vehicles or property.

Let’s say Brianna just purchased a 2010 Toyota Corolla for $6,000, and spent $1000 on repairs, maintenance, registration and financing fees. Brianna lives in an area where there have been car thefts in the past, but after checking the price of comprehensive car insurance repayments – $852/year – she decides to instead pay CTP insurance only.

Two years later, Brianna’s car is stolen. As her CTP insurance only covers damage caused to other cars in a collision, Brianna is not covered. Had she paid the $1704 in insurance, Brianna would have been able to claim back the market value of her car. Instead, she is now left with nothing but the stress of buying another car.

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How much will you really pay?

RateCity analysis shows that a car loan of $30,000 over a five year loan term, has an average monthly repayment of $603.68, an average annual fee of $87.63, and an average interest rate of 7.68 per cent.

That equates to $6,222 in interest that you will pay on your loan over the five year term. That’s almost 20% more than your original loan amount.

Comparing Secured & Unsecured Car Loans

Interest rates, fees and loan types can have a significant influence on your monthly repayments.

See how they differ in the table below, where our analysts have compared six low interest car loans currently available on the market, based on a $30,000 loan over five years:

Minimum Interest Rate p.a.

Maximum Interest Rate p.a.

Product Name

Lender/ Financier

Ongoing fees

Repayment type

Car Loan Type

Comparison Rate

Application Fee

Monthly Interest Rate

Monthly repayment

6.45%

6.45%

Fixed Rate Car Loan

Teachers Mutual Bank

$0

FIXED

UNSECURED

6.59%

$100

0.54%

$586.28

8.5

16.99%**

Personal Loan Fixed Rate

HSBC

$5/month

FIXED

UNSECURED

9.06%

$150

0.71%

$615.50

8.99

8.99%

Personal Loan Unsecured

Newcastle Permanent

$0

FIXED

UNSECURED

9.35%

$250

0.75%

$622.61

4.29

4.29%

Green Car Loan

loans.com.au

$0

FIXED

SECURED

4.84%

$400

                     0.36 %

$556.43

4.79

4.79%

Car Loan

Credit Concierge

$0

FIXED

SECURED

5.34%

$400

                     0.40 %

$563.26

5.29

5.29%

Green Car Loan Fixed (Special)

Bank First

$0

FIXED

SECURED

5.5%

$150

                     0.44 %

$570.13

Data accurate as of 30th July 2019.
**Depending upon your personal financial situation, credit score and ability to make repayments, HSBC will create a personalised rate between 8.5 – 16.99%
As with all financial products, the “best” option for you will depend upon your personal circumstances and financial situation.

What is a loss payee?

If you decide to get a secured loan, whereby the car is used as security against the loan, financiers can seek to be named as a loss payee on your insurance policy. This means that in the event on an insured loss, the financier receives the insurance payout, not you.

Once you pay off your car loan, you can then choose your insurance as you wish, as it is only within the loan term that you must abide by the lender’s procedures.

What is GAP insurance?

Guaranteed Asset Protection/Motor Equity Insurance (GAP insurance) provides an extra level of protection for drivers with a car loan.

GAP insurance will cover the difference between the amount your car insurance pays, and the amount you owe you lender or financier. This is particularly important with newer cars, as you consider the rate of depreciation.

However, be sure to read the fine print in your GAP insurance policies, as many lenders will only pay out when the driver has successfully completed a total loss claim through their insurer.

Things to watch out for:

• Loan protection insurance is often sold as an add-on in car dealerships, to help you make repayments if you experience financial difficulties. Be sure to shop around for loan protection insurance if you wish to take it out, as dealership insurances can have high fees.
• Do not sign any documents when purchasing your loan saying that the car is for business purposes, if you are going to use it personally. If you do this, you will no longer be covered by consumer rights under the credit law.
• Check your lender/financier’s license by calling the ASIC Infoline on 1300 300 630
• Ask for a credit guide before you sign anything. All lenders must provide this guide, which includes their licence number, fees and details of your right to complain
• Struggling to meet your repayments? If you experience financial problems, you have the right to apply for a hardship variation.

If your lender refuses to comply with any of the above issues, you can complain to the Australian Financial Complaints Authority (AFCA) on 1800 931 678.

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Learn more about car loans

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.

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.

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 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.

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 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 loan-to-value ratio?

The loan-to-value ratio, or LVR, is a percentage that expresses the amount of money owed on the car compared to the value of the car. For example, if you take out a $15,000 loan to buy a $20,000 car, you have a loan-to-value ratio of 75 per cent. Loan-to-value ratios change over time as you pay off your loan and your car depreciates in value. For example, two years later you might now owe $10,000 on your car, which might now be worth $15,000. In that case, although there would still be a $5,000 difference between the size of the outstanding loan and the value of the car, the loan-to-value ratio would now be 67 per cent.

What is a car loan?

A car loan, also known as vehicle finance, is money that a consumer borrows with the express purpose of buying a vehicle, such as a car, motorbike, van, truck or campervan. Car loans can be used for both new and used vehicles.

Can I get a car loan with poor credit?

Poor credit doesn’t necessarily mean you won’t be able to get finance for your car purchase, though your options aren’t likely to be the same as someone with good credit.

In fact, a number of specialist lenders exist offering car finance for customers with poor credit, able to provide access to bad credit car loans.

However having a history of poor credit will likely mark you as a potential risk to lenders, so your car financing needs could see higher fees and interest rates. Alternatively, consider a secured car loan, which is a type of loan that uses the car you purchase as collateral, reducing the risk.

Other options include getting someone close to act as a guarantor for your car loan, or to talk to a broker about a personalised rate specific to your circumstances.

What is collateral?

Collateral, or security, is an asset you agree to surrender to a lender if you fail to repay a loan. Generally, the collateral for a car loan is the car itself. So if you fail to repay the loan, the lender might seize your car, sell it and then use the proceeds to recover their debt.

What is an LVR?

The LVR, or loan-to-value ratio, is a percentage that expresses the amount of money owed on the car compared to the value of the car. For example, if you take out a $15,000 loan to buy a $20,000 car, you have an LVR of 75 per cent. LVRs change over time as you pay off your loan and your car depreciates in value. For example, two years later you might now owe $10,000 on your car, which might now be worth $15,000. In that case, although there would still be a $5,000 difference between the size of the outstanding loan and the value of the car, the LVR would now be 67 per cent.