Top three questions you should ask when getting a car loan

Top three questions you should ask when getting a car loan

Finding the perfect new car can be hard. It has to be the right brand, have the right features and of course the right look.

While it pays to be picky when choosing your car, the same is true when it comes to car loans. Getting stuck in a car loan with high interest rates or fees can continue to have bad financial repercussions long after the excitement of owning a new car has worn off.

The best way to avoid an impulse car loan decision, that will leave you paying through the nose, is to do some research on the right loan for you. RateCity spoke to Michael Cullinan, Director of Rapid Finance, about the best questions to ask about a car loan before signing on the dotted line.

Is this a good interest rate?

Knowing what is considered a good interest rate in the market is essential to being able to compare the loans on offer against a bench mark. Currently the lowest loans are under five per cent but are only available to customers who are securing their loan against an asset. This asset is usually the car that is being purchased.

“Securing your loan is the best way to get access to the lowest interest rates,” says Cullinan, “and for added security you can fix your interest rate so that you can plan your repayments going forward.”

Deciding on a fixed or variable interest rate is also an important consideration. A fixed interest rate will remain the same over the loan term but a variable interest rate will fluctuate at the lenders discretion.

“Fixing can seem like a risk, as you might miss out on lower interest rates down the track, but if you prefer peace of mind in knowing your repayment amount over the term of the loan fixing is the best option.

“Although, if you don’t mind the potential risk of higher interest rates for a period of your loan, there is the possibility of saving money on interest over time with a variable loan,” says Cullinan. 

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What fees are involved?   

Once you have found a loan with a competitive interest rate it is important to look at the fees that will be charged on a once off and ongoing basis. From establishment fees to account keeping fees and early termination fees, you might find that what initially seemed like a great deal will end up costing a fair bit more over time.

“Checking the comparison rate of a car loan is a great way to understand the overall costs associated with the loan,” advises Cullinan.

The comparison rate includes the interest rate and fees associated with a loan to provide customers with a more accurate representation of what they will be paying to the lender in total.

An important fee, that is often over looked by those taking out car loans, is the residual fee or ‘balloon payment’ charged at the end of the loan term. The residual fee is a lump sum payment, that you can opt to include as part of your loan, which keeps monthly repayments down but has to be paid at the end of the loan before the car is completely owned by the customer. Before signing up for a loan with a residual payment consider how you will pay the amount when the time comes and budget it into your savings plans.

Can I make the repayments?

The single most important question that customers should ask before taking out a car loan is whether or not they will be able to afford the repayments over the life of the loan.

“Calculating your monthly repayments and factoring them into your budget before you take out a loan is the key making sure you will have no issues down the track,” says Cullinan. You can use a car loans calculator to estimate your monthly repayments.

Keeping in mind that circumstances can change, and preparing a buffer, is just as important.

“If you find that you can comfortably make your expected car loan repayments now, consider what would happen if you were to have an unexpected expense one month,” says Cullinan, “If you don’t think you could afford the repayment in this situation you may have to save up a buffer before committing to a loan.”

In some cases, missing a repayment on your car loan can mean that interest rates are jacked up for the remaining term of the loan, costing you more in the long run. Doing some budget planning beforehand, with the help of a car loans calculator, will help prepare you for all the possibilities and prevent you from defaulting on the loan.

This article is sponsored by Rapid Finance. For more information on Rapid’s extensive range of car loans, including secured and bad credit car loans, visit: https://gorapid.com.au/car-loans/
 

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Learn more about car loans

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.

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 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 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 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.

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.

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 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 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 are the pros and cons of guarantor car loans?

Like all things, there are positives and negatives to guarantor car loans, though one may outweigh the other depending on your needs.

Guarantor car loan pros may include that you’re more likely to be approved for a long if you have no credit or a history with bad credit, that you’re more likely to secure a car loan with a lower interest rate, and that because your guarantor car loan is based on a relationship, you will be more inclined to meet your repayment schedule.

However, there are negatives, as well. Guarantor car loan cons may include leaving a detrimental mark on a personal relationship with added strain if you don’t meet your repayments, and you may take out a loan that you can’t actually afford.

Weighing these pros and cons will give you a greater understanding of whether a guarantor loan is ideal for your circumstances.

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.

Can I get a car loan with bad credit?

Yes, you can get a car loan with bad credit, although you’ll probably find the process trickier and dearer than that experienced by people who have good credit histories.

You can find a number of lenders that specialise in bad credit car loans. However, make sure you compare bad credit car loans before you sign on the dotted line, because not all car loans are alike and having bad credit may mean you are more likely to be hit with higher fees and interest rates.

If you have bad credit, it’s important not to take out a car loan unless you can afford the repayments because a default could further damage your credit rating. Conversely, if you make all the repayments and repay the loan successfully, your credit rating might improve.