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Can I increase my home loan to buy a car?

If the time has come to upgrade to a new set of wheels, but your savings won’t quite cover the purchase cost, you might be weighing up your financing options.

What is understandably at the top of the list for most is the loan product’s interest rate, and it makes sense to want to find the lowest rate that’s available to you.

Often, even the most competitive interest rate car loans will still have a higher interest rate than your home loan, and that has a lot to do with the fact that car loan terms are typically around 20 years shorter than home loan terms.

Cars also typically depreciate in value over time, whereas homes are generally more likely to see an increase in value over time. This makes your car loan a bigger risk to the bank than your home loan.

Regardless, this might leave you wondering whether you can add a car loan to your home loan, in order to access a lower interest rate.

There are a couple of potential options you may have if you want to increase your home loan to buy a car:

  1. Use your redraw facility, or;
  2. Refinance your home loan to access additional funds.

However, it’s important to understand the potential risks associated before going down that route. 

How can I add a car loan to my home loan?

Redraw

If you’ve been somewhat routinely making extra repayments on your home loan that amount to at least the purchase cost of your desired new vehicle, you could potentially redraw these funds from your home loan account to buy the car.

If your home loan does offer a redraw facility, this could be a reasonably fast and easy process that doesn’t involve reapplying for finance. It would also mean that you’ll avoid having an additional loan repayment to manage.

The biggest sacrifice in taking this option is that you are essentially undoing the hard work you put into making extra repayments on your home loan. Extra repayments can potentially shorten your home loan term by a number of years, reducing your interest charges over the life of the loan. If you redraw, you’ll miss out on these savings which can cost you more money in the long run and prevent you from owning your home sooner.

Also, keep in mind that even if your home loan offers a redraw facility, you may be charged a fee for redrawing funds, plus there could be a limit to how much you can redraw.

Refinance 

Your second option is to refinance your home loan in order to access additional funds to buy a car. You could do this with your current lender, or switch to a new lender if that means potentially accessing a more competitive rate. 

While refinancing for this purpose will give you access to your home loan’s interest rate instead of a likely higher car loan rate, keep in mind that it also means you will be paying off your car over a much longer period of time. In fact, there’s a good chance you’ll still be paying off your car when the time comes to upgrade it again.

Despite the potential to access a lower interest rate, the considerably longer loan term will likely mean paying thousands of dollars more in interest charges over the life of the loan.

Other perceived advantages and potential long-term consequences

Often the decision to upgrade your car comes out of necessity over want. The family car may have done its dash and maintenance costs might be steadily rising at every regular service.

If this is the case, you may not have been prepared for any extra repayments additional to your current home loan repayments. Accessing your redraw or refinancing your mortgage is one way to get around adding to your regular monthly liabilities, but it will likely come at a substantial cost.

Again, depending how long is left on your mortgage term, using your home loan to buy a car without increasing your current home loan repayments will generally mean paying much more in interest charges than if you take out a separate car loan.

What are some alternative options?

Even though you can increase your home loan to buy a car, it doesn’t mean it’s the best option.

If you’re interested in keeping your overall repayment costs down without potentially adding a substantial amount to your long-term interest charges, consider these alternatives:

  • Buy used: Brand new cars depreciate in value at a steady rate, meaning buying second-hand could save you thousands and allow you to take out a smaller loan.
  • Choose a car loan on a longer term: If the cost of your immediate repayments is your biggest worry, you could reduce them by opting for a car loan with a longer loan term, such as seven years instead of five. Even though this typically means paying more interest over the life of the loan, it is still much shorter than an average 25-year mortgage.
  • Use your mortgage, but increase your repayments: If you are still interested in consolidating your mortgage and car loan, do your calculations and make extra repayments that will pay your car off over an average car loan term. Some home loan lenders will even allow you to put the amount you borrow for your car into a sub-account, potentially making it easier for you to ensure you pay it off within around five years.

For advice specific to your unique financial circumstances, consider reaching out to a financial advisor.

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Fact Checked -

This article was reviewed by Senior Journalist Tony Ibrahim before it was published as part of RateCity's Fact Check process.

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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.

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 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.

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 to get a chattel mortgage?

Both businesses and individuals may use a chattel mortgage, provided that the car is being used predominantly for business purposes. 

To apply for a chattel mortgage, you need to first consider your options and choose a suitable lender that meets your requirements. Once you have selected a lender, you can apply for the loan online by filling out a form. If the lender doesn’t offer an online application process, you can either call them or visit their nearest branch. 

After you’ve applied, the lender will ask you to supply documents that confirm your identification, income, job profile, etc. If everything is in order, most lenders will arrange the loan’s settlement, so all you need to do is pick up your car!

Can you get a chattel mortgage with bad credit?

Getting approval for a chattel mortgage with bad credit may be possible, given ‘chattel’ (usually a piece of equipment or car) is put up as security for the loan. That means if you fail to repay the loan, the creditor can recover the loaned amount by repossessing and selling the car or piece of equipment. This differs from unsecured car loans, where the asset is not tied to the loan and cannot be taken if you don’t meet the repayments. 

What is vehicle finance?

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

What is proof of residence?

Before giving you a car loan, lenders will ask for proof of residence – documentary evidence that you live where you claim you live. Lenders will typically want some combination of utility bills, bank statements, mortgage documents or driver’s licence. The reason lenders want proof of residence is to verify your identity and credit history.

What is dealer finance?

Dealer finance is a car loan organised through a car dealer – as opposed to car loans organised by a finance broker or directly by the lender.

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.

What is credit history?

Your credit history is a record of the dealings you’ve had with credit providers such as banks, credit card companies, mobile phone companies and internet companies. Your credit history records how successfully you’ve managed your repayments. It also records how many credit applications you’ve made and how many of those were rejected.

Credit providers refer to your credit history when deciding whether or not to extend you credit. Missing repayments is a bad sign; making too many applications or having applications rejected can also be a bad sign.

Credit infringements can remain on your credit history for five years – or seven years for serious infringements.

Are bad credit car loans legit?

Bad credit car loans are legit, although not all lenders and products are created equal.

Some car loan lenders refuse to do business with borrowers who have bad credit histories, but there are others that are willing to provide bad credit. There is a catch, though: some bad credit lenders are disreputable, while some bad credit loans have extremely high interest rates and fees.

That’s why it’s important to do your research and compare bad credit car loans before you submit an application.