A quick guide to car loans in Australia
As the only country in the world that's also a continent in its own right, Australia offers boundless opportunities to explore its rich and varied cities, towns, bush and desert by car. And that's not forgetting the vast amount of coast where you can drive on a long holiday or just a weekend break.
Owning a car is essential for many Australians, whether it's to get to work, take the kids to school, do the shopping, visit friends or take to the wide open roads. If you want to buy your first car or upgrade to a brand new one, an Australian car loan could turn your dreams into reality.
How do car loans in Australia work?
Australia’s car loans market is very competitive, so there are lots of lenders and products to choose from. There are various ways you can get a car loan – you can go direct-to-lender, or you can use a comparison website, a finance broker or a car dealer.
Your choice of car loan will depend on your personal circumstances and preferences. A secured car loan, for example, where your car, your property or another valuable asset is used as a guarantee for the loan, will usually have a lower interest rate than that of an unsecured loan. Your credit history will be checked during the application process.
What does a car loan include?
- Interest rate –e.g. 7.95 per cent
- Interest type – variable or fixed
- Loan size –e.g. $30,000
- Loan term –e.g. five years
- Loan type – secured or unsecured
- Loan repayments – weekly, fortnightly or monthly
- Loan fees – establishment fee, account-keeping fee, redraw fee, late payment fee, early repayment fee
What are the main features of car loans in Australia?
You can be offered a number of different types of car loan, with interest rates that could be variable or fixed. Features may include the option to make flexible repayments to suit your cash flow, or introductory offers with low interest rates for a fixed period.
A balloon payment arrangement offers you smaller regular payments with a large one at the end of the loan term, and usually results in higher total repayments over the life of the loan. If you don’t have the money to make the final end-of-loan payment, it might be possible to refinance that outstanding amount.
Flexible payments permit you to make more than your minimum repayment, but you may be restricted by your lender as to how many times you can do this. Watch out for additional fees that lenders may charge for this option, and always examine penalty clauses and upfront fees, as well as interest rates, before you make a decision.
What is the interest rate for a car loan?
The interest rate for a car loan is the price you pay for ‘buying’ money off a lender. For example, you might buy a $30,000 loan at a price (or interest rate) of 10 per cent per annum. That means that your repayments are 10 per cent per year (or 0.83 per cent per month) of your remaining loan balance.
So for the first monthly repayment of your $30,000 loan, you would have to pay $250 in interest payments (plus extra for principal repayments). But once your loan has been reduced to $15,000, you would have to pay only $125 in interest payments (plus extra for principal repayments).
Where can I buy cars in Australia?
What is the average car loan interest rate?
What’s the average car loan interest rate? That’s a bit like asking how long a piece of string is. Unfortunately, there’s no ‘normal’ rate, because interest rates move up and down all the time. So the average interest rate on a car loan today might be different to the average interest rate on a car loan tomorrow.
Like all averages, the average car loan interest rate is derived from many rates, some higher and some lower. So if the average car loan interest rate at a particular moment was 10 per cent, you might be able to find rates starting from as low as 5 per cent and climbing to as high as 30 per cent.
The point is that you don’t need to settle for paying the average interest rate on a car loan. If you use a comparison website like RateCity, and look at lots of loans, you’ll give yourself the best chance of getting a car loan with a below-average interest rate.
What are some car loan traps to avoid?
Lenders will advertise an interest rate, but you should always use a loan comparison tool to factor in all the fees and charges, not just the interest rate. It's easy to be baffled by the jargon, so rather than guessing, take the time to get an accurate idea of how much each loan really costs.
To get the best deal available, use the comparison rate instead of the advertised rate. The comparison rate factors in any additional charges and fees, thereby giving you a more accurate illustration of the true cost of each loan. Use a loan calculator to help you to work out the monthly payments you will need to make.
Read your car loan agreement carefully before making a commitment to avoid running the risk of defaulting on your payments, which could ultimately damage your credit history. Also, while you might take advice from a finance professional, don’t forget that you are ultimately responsible for any loan you sign up for.