What is the best car loan?*
Unfortunately, we can’t point to one particular car loan and declare it to be “the best” of the lot. After all, the loan that’s the best for your unique financial situation may not be ideal for other borrowers, due to the great variety of lenders and loan offers available in the competitive Australian car loan marketplace.
At RateCity, you can compare car loan features, interest rates, fees and repayment terms, and use this information to determine which car loan will be the best for you. Read through our guide, compare the car loan offers available from the different lenders, and make a smarter, more informed decision when you choose your car loan.
How to get the best car loan rate
While there is no one “best” car loan rate that applies to everyone all the time, there can be a best car loan rate that applies just to you at one moment in time. Here are three ways to get the best car loan rate:
- Shop around
- Get professional advice
- Become a more credit-worthy borrower
Shop around – Comparison websites like RateCity allow you to quickly sort car loan products from dozens of lenders, based on interest rates, upfront fees and other criteria. By filtering according to your preferences, you can start to work out what the best car loan would be for you at this specific time.
Get professional advice – If you want to work out the true value of a car loan, it’s not enough just to look at its interest rates and fees – you also need to look at its features. Sometimes, these can be hard for a consumer to properly evaluate, so it might be useful to get advice from a finance professional.
Become a more credit-worthy borrower – The more confidence a lender has in your ability to repay money, the more generous its lending terms are likely to be. Lenders are more likely to offer you a lower interest rate if you have a good credit record, a reliable income, a high savings rate and a significant deposit.
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, calculate the difference between the cost price and your savings, and borrow accordingly. The second is to calculate the maximum you could afford to borrow and then search for a car with that budget in mind.
Whatever approach you take, you might want to borrow a little bit extra to cover add-on costs such as application fees and insurance. Remember, though, that if you increase your loan amount or your loan term, you will ultimately pay more money over the life of your car loan.
Australia’s most popular car brands
- Mercedes Benz
- Land Rover
Source: ABS 2017 Motor Vehicle Census
How much are car loan repayments?
When comparing car loans, try to get an approximate idea of how much you can afford to pay back each month, and use this figure to help you determine which car loans may be the best for you. One way to do that is to use a car loan calculator.
Remember that if you opt for a car loan with a variable interest rate, your repayments could go up or down from month to month. So if you’re planning your budget in advance, it’s worth leaving a bit of wiggle room just in case of surprise interest rate rises.
If you’d rather avoid the risk of rate rises, you could opt for a fixed-rate loan, where the interest rate stays the same for the life of the loan. The downside, though, is that you won’t enjoy any savings if interest rates fall.
One way to lower your monthly repayments would be to opt for a ‘balloon payment’ arrangement. The trade-off, though, is that you will also have to make a one-off lump sum payment at the end of the loan, which will result in greater total repayments than if you avoided the balloon arrangement and chose higher monthly repayments.
Another way to lower your monthly repayments would be to increase your loan term. Again, though, the price you pay for lower instalments is to pay more in interest over the life of the loan, so think carefully before choosing this option.
When researching car loans, don’t forget to 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 (such as application fees and account-keeping fees), so it should give you a better idea of the true cost of the car loan.
What are secured and unsecured car loans?
There are two types of car loan – secured car loans and unsecured car loans. A secured car loan is one in which you offer the lender a form of security, or collateral, which the lend can seize if you fail to repay the loan. The security will generally be the car you’re buying.
An unsecured car loan, by contrast, doesn’t have any collateral attached to it. That makes it a riskier proposition for lenders, so they compensate by charging higher interest rates than for secured car loans. That’s if they choose to offer unsecured car loans – because some lenders only offer secured car loans.
Should I buy a new car or a used car?
When it comes to car loans, there are pros and cons associated with both new cars and used cars. Lenders tend to prefer new cars, because they feel more confident they will be able to resell it for a decent price if they have to seize the car off you (if you default on the loan).
That said, new cars cost more than used cars, so they require a higher loan amount. Bigger loans, are riskier than smaller loans, because they take longer to pay off, which means there’s more opportunity for something to go wrong (such as you losing your job and defaulting on the loan).
Used cars come with more wear and tear and older technology, which can affect their resale value. That said, they usually depreciate more slowly than new cars, which lose value the moment they’re driven out of the dealership. Also, they usually require lower loan amounts.
Can I repay my car loan early?
Got a salary bonus or a tax refund recently? You might want to add that to your car loan repayments, on top of your regular instalments. After all, the sooner you pay off the loan, the less interest interest you’ll get charged.
But some lenders don’t like missing out on interest – particularly for fixed loans – and therefore impose a penalty fee if you make extra repayments or close your loan early. So make sure you understand how your car loan works before going down this road.
Some loans come with a ‘redraw facility’, which is actually designed to allow you to make extra repayments. If you find yourself short of money one month, you can actually claw back some or all of the money in your redraw facility. Again, check the terms and conditions, because redraw facilities often come with strings attached.
Australia’s most satisfying car brands
- Mazda 95.3%
- Volvo 95.2%
- Lexus 95.0%
- Skoda 94.8%
- Isuzu Ute 94.7%
- Toyota 94.6%
- Mercedes-Benz 94.5%
- BMW 94.4%
- Peugot 94.3%
- Subaru 94.3%
- Audi 94.2%
- Renault 94.2%
- Suzuki 94.1%
- Volkswagen 93.9%
- Kia 93.9%
- Hyundai 93.8%
- Land Rover 93.3%
- Honda 93.2%
- Nissan 92.3%
- Mitsubishi 92.2%
Source: Roy Morgan Research 2017 Automotive Satisfaction Report
Do I need a deposit for a car loan?
As a general rule, it’s better to put down some sort of deposit when you take out a car loan. First, you’ll probably get better terms from the lender. Second, you’ll be able to pay off the loan faster and therefore get charged less in interest.
However, some lenders will allow you to take out a car loan even if you don’t have a deposit. This is known as a no-deposit car loan or a 100 per cent LVR (loan-to-value ratio) car loan. But a no-deposit car loan will usually incur a higher interest rate than, say, an 80 per cent LVR car loan.
How do I find the best car loan?
As you can see, buying a car and taking out a car loan involves a range of variables:
- New or used
- Secured or unsecured
- Interest rate
- Interest type
- Loan size
- Deposit size
- Repayment options
That’s part of the reason why it’s impossible to identify one ‘best’ car loan – the product that’s best for one person won’t be best for another. Also, as your circumstances change, the product that’s best for you today might not be the same product that’s best for you tomorrow.
Another point worth mentioning is that the car loan market is very competitive and therefore in a state of flux. Lenders often make changes to their products and policies in order to win market share. So the ‘best’ car loan on the market can change from month to month.
*The phrase 'some of the best' is not a product endorsement or recommendation. This information should be used as a guide only. The product table does not include all products.