Can I increase my home loan to buy a car?

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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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.

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 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 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.

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 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.

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.

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.

Where can I find lenders who offer no credit check car loans?

There are companies that claim to offer no credit check car loans. However, you may find that companies that offer no credit check car loans have high fees and high interest rates.

You might be better off finding a specialist lender who will look at your credit history and income, who will decide whether or not you are able to responsibility pay back the loan. Alternatively, you could contact a car finance broker.

Can I get car finance on a pension?

 

Yes, as long as you meet basic criteria set out by lenders you are eligible for car finance. Your interest rate will be determined based on your financial history which can be found in your credit report, your income and any property you may own.

Comparing car loans for pensioners before you settle on one is important though, if you want to secure the best possible loan for your circumstances.

How much can I get towards a new car as a single parent?

It really depends on your financial circumstances as to how much a lender will grant you towards a new car as a single parent. With most lenders, the smaller the loan you apply for, the higher your chances are of approval, so getting a cheaper car or adding some savings of your own, may be a valid option if you are struggling for approval on a car loan.

Can I buy a car as a student?

Buying a car is a huge financial decision, and shy of marriage and purchasing a house (or perhaps around the world travels), it may be the biggest financial decision you make. But if you’re looking at your empty pockets, don’t despair! Your dream of owning your own car could become a reality, if you look for and compare the right car loans for your circumstances.