What is the best car loan?
No one can point to one car loan and declare it to be the ‘best’ of the lot. After all, the best loan for your financial situation may not be ideal for other borrowers. At RateCity, you can compare car loan features, fees and more to help you find a car loan that suits you. Read our guide and compare car loan offers from different lenders before choosing your car loan.
How to get the best car loan rate
There is no one “best” car loan rate that applies to everyone all the time. Instead, there are three ways to find the best car loan rate for you.
- Shop around: comparison websites like RateCity let you quickly compare car loan products from dozens of lenders. By filtering using your preferred interest rates, upfront fees and more, you can work out which car loans may be best for you.
- Get professional advice: to find the true value of a car loan, it’s not enough to look just at its interest rates and fees. You also need to look at its features. Because car loans can be hard to understand, you may want to get advice from a finance professional.
- Become a more credit-worthy borrower: if a lender is confident that you can afford to repay a loan, they’re more likely to lend you money on favourable terms. Lenders are more likely to offer lower interest rates if you have a good credit record, a reliable income, high savings and a significant deposit.
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What you should know before you get a car loan
How much can you borrow with a car loan?
There are two ways to approach car loans. The first is to decide what car you want, compare its cost to your savings, and calculate how much you’ll need to borrow. The second is to calculate the maximum you can afford to borrow and search for a car that fits your budget.
Either way, you might want to borrow more to cover add-on costs, such as application fees and insurance. Just remember that if you increase your loan amount or loan term, you will pay more money in total for your car loan.
Do you need a deposit for a car loan?
Making a deposit or down payment on a car loan may help you get better terms from the lender, pay off the loan faster and pay less in interest.
Some lenders will let you take out a car loan even if you don't have a deposit. However, no-deposit car loans, also known as 100 per cent LVR (loan-to-value ratio) loans, may have higher interest rates than 80 per cent LVR loans, where you put down a 20 per cent deposit and borrow the rest.
How much are car loan repayments?
If you choose a car loan with a variable interest rate, your repayments could rise or fall from month to month. So, if you’re planning your budget in advance, it’s worth leaving some wiggle room in case of surprise interest rate rises.
If you’d rather avoid the risk of rate rises, you could choose a fixed-rate loan, where the interest rate always stays the same. The downside is that you won’t enjoy any savings if interest rates fall.
One way to lower your monthly repayments is to add a “balloon payment” to your car loan. This is a one-off lump sum paid at the end of the loan period. While a balloon payment can lower your costs from month to month, you could end up paying more in total for your car loan, depending on how you handle your balloon.
Another way to lower your monthly repayments is to increase your loan term. However, making a larger number of lower monthly instalments means you’ll be charged more in total interest over the life of your loan.
When researching car loans, look at each loan’s comparison rate, which is likely to be higher than the advertised rate. The comparison rate includes both the interest rate and any fees, to give you a better idea of the car loan’s true cost.
How will the best rate affect you?
Getting the best car loan rate for you is one part of the equation, but the other is knowing how much it will cost you.
What are some of the best car loan features?
What are secured and unsecured car loans?
When you apply for a secured car loan, you need to offer something as security, or collateral, to the lender. If you don’t repay the loan, the lender will seize your collateral. Car loans are often secured by the car you’re buying itself.
Unsecured car loans don’t have any collateral attached. This is riskier for lenders, so unsecured car loans often carry higher interest rates.
Should you buy a new car or a used car?
There are pros and cons to buying new or used cars with a car loan.
Loans for new cars often have lower interest rates than loans for used cars. This is because lenders feel more confident they can resell a new car for a decent price if you default on your payments.
However, new cars tend to cost more than used cars. This means you’ll need a bigger loan to buy one, which comes with its own risks.
Used cars tend to have more wear and tear and older technology, which can affect their resale value. That said, they’re often cheaper to buy, and depreciate more slowly than new cars, which lose value the moment they leave the dealership.
Can you repay a car loan early?
If you find yourself with extra money in your budget, you could make extra repayments on your car loan. This can help you pay your loan off sooner and pay less total interest. But some lenders don’t like missing out on interest – particularly for fixed loans – and charge penalty fees if you make extra repayments or close your loan early.
Some car loans come with a redraw facility, which lets you withdraw any extra repayments from your car loan if you need the money. Check the terms and conditions, because there may be fees involved.
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.
There’s no set number. That’s because borrowing capacity differs from person to person, as well as lender to lender.
Lenders don’t give out car loans unless they’re confident they’ll be repaid. Each person is different, so the amount of money one person can successfully borrow will differ from another person’s number. Also, each lender uses its own formulas to calculate borrowing capacity – so Mr & Mrs Smith might find that while Lender X will give them a car loan for $20,000, Lender Y will offer only $18,000.
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.
A car loan calculator is an online tool that helps consumers understand how much they would have to repay under different scenarios. Consumers can create these different scenarios by entering different borrowing amounts, interest rates, loan terms and repayment schedules into the car loan calculator.
Mark Bristow is a senior financial writer for RateCity and an experienced analyst, researcher, and producer. Working for over ten years, Mark previously wrote and researched commercial real estate at CoreLogic, and has seen articles published at Lifehacker and Business Insider, among others. Most recently, Mark has joined RateCity working across finance as a whole. Whatever the topic, Mark’s goal is always to provide simple solutions to complex problems.