What is a car loan calculator?
A car loan calculator is an online tool you can use to figure out how much you’d have to repay under different borrowing scenarios. RateCity’s car loan calculator lets you play around with the borrowing amount, interest rate, loan term and repayment frequency.
Car loan calculators work best when you have a rough idea of what you’re looking for. So before using a car loan calculator, here are three things you should have a rough idea about:
- How much you plan to borrow
- The length of your car loan term
- The interest rate you’d like to pay
How much you plan to borrow – This is usually enough just to cover your car purchase, although some car loans can also include other expenses, such as insurance costs and extended warranties. Keep in mind that the more money you borrow, the longer it may take to pay back your car loan, and the more interest you'll likely be charged.
The length of your car loan term – A shorter term means higher repayment instalments but ultimately paying less in interest over the life of the loan. A longer loan term means lower repayment instalments but ultimately paying more in interest over the life of the loan.
The interest rate you’d like to pay – While many of us would love a cheap car loan, these loans may also have more specific lending criteria and thus may not be available to all borrowers. Some car loans with higher interest rates may offer more features and greater flexibility, which may provide greater value for money to the right borrower.
The best way to use a car loan calculator is to play around with different scenarios. So type in a range of borrowing amounts, loan terms, interest rates and repayment schedules. You might be surprised to discover how seemingly minor changes to the car loan calculator can result in significant changes to your repayment instalments.
How interest rates affect car loan repayments
For a $30,000 loan over five years...
|Interest rate||Monthly repayments||Total interest||Total repayments|
How much does a car loan cost?
A car loan comes with two main costs – interest and fees. The car loan market changes all the time, so there is no ‘normal’ interest rate. In some years, rates will be higher; in others, lower. That’s the nature of a market.
But whatever the average market rate is at the time, this average will be made up of several hundred different products, covering a wide range of interest rates. So you should never just accept the average rate – shop around and see if you can find a better deal.
Car loan fees also fluctuate, depending on market conditions and the level of competition. Depending on the lender and the product, you might have to pay some or all of these fees:
- Application fee
- Monthly account-keeping fee
- Redraw fee
- Late payment fee
- Early repayment fee
What is a car loan?
A car loan is a loan that is specifically used to buy a vehicle, such as a car, van, motorbike, campervan or truck. There are two different types of interest you can be charged – variable-rate interest and fixed-rate interest. Some loans allow you to choose your preference, while others will only allow give you one option.
With a variable-rate car loan, the lender is entitled to change the interest rate at any time during the life of your loan. For example, your loan might start at 7.50 per cent; six months later, it might increase to 7.60 per cent; three months after that, it might fall to 7.45 per cent.
With fixed-rate car loans, the lender cannot change the interest rate during the fixed-rate period. For example, if you take out a five-year loan that is fixed at 7.50 per cent, you can be certain that the interest rate will remain steady during those five years.
However, once the fixed-rate period ends, your loan might automatically be reclassified as a variable-rate loan. In that case, you would be charged whatever the variable rate happened to be, whether it was lower or higher. This is something to ask about before signing on the dotted line.
The great thing about a car loan calculator is that it allows you to test different repayment scenarios, which means you can see how your finances would be affected by a rise in interest rates or a fall in interest rates.
What is a secured car loan?
With a secured car loan, you use your vehicle as collateral to guarantee the loan. If you default on your repayments, your car could be repossessed to cover the lender’s losses. In that case, your car might sell for less than the outstanding debt.
To cover themselves, some lenders will provide secured car loans only for new cars or particular used car models under a certain age. That way, the resale price is likely to exceed any outstanding debt. You can use a car loan calculator to work out what your repayments might look like if you took out a secured car loan.
What is an unsecured car loan?
With an unsecured car loan, you don’t have to provide any collateral to the lender. However, unsecured car loans generally have higher interest rates than secured car loans, because lenders regard them as riskier. To ensure you don't take out an unaffordable car loan, punch some numbers into a car loan calculator and see if you can meet the repayments.
How do I get a car loan?
If you’ve decided you want to take out a car loan, there are four different ways you can get finance:
- Use a comparison website like RateCity
- Let the dealer arrange your finance
- Approach a lender directly
- Go through a finance broker
Using a comparison website allows you to quickly compare dozens and dozens of different car loan products, and to filter the loans based on your preferences. With RateCity, when you find a car loan you like, just click and take things from there.
Letting your car dealer organise your loan for you is arguably the most convenient option – but it’s also likely to be the least beneficial. That’s because dealer finance is often less flexible and more expensive. You might also feel pressured to make big decisions on the spot.
Approaching a lender directly will allow you to cut out the middleman (i.e. the car dealer). The key, though, is to choose the right lender, because the lender will only discuss its own products. Comparison websites like RateCity make it easier for you to narrow down your options.
The final option is to go through a finance broker. Brokers offer several positives – they generally don’t charge for their services, they offer expert advice and they give you access to a range of options. The negative, though, is that brokers will only discuss lenders on their panel – and brokers are highly unlikely to have every lender on their panel.
Whatever option you choose, you should first use a car loan calculator so you're better informed before you start discussing options. That way, you’ll be in a much better position to understand whatever the finance professional tells you – and, if necessary, to negotiate better terms on your car loan.
How loan terms affect car loan repayments
For a $30,000 loan at 9.00 per cent…
|Loan term||Monthly repayments||Total interest||Total repayments|
What documents do I need to get a car loan?
Different lenders have different requirements, but here are the documents you’ll probably be asked to provide:
- Proof of identity (100 points of identification)
- Proof of income (utility bill, council notice)
- Proof of savings (payslips, bank statements, tax return)
- Proof of liabilities (bank statements, investment documents)
- Proof of insurance (insurance documents)
How much can I borrow with a car loan?
Lenders don’t hand out money unless they’re confident the loan will be repaid. So one way to think of borrowing capacity is to imagine that it starts at $1 for each person and continues rising until the lender believes it has reached that particular person’s limit. For one person, that might be $10,000; for another, that might be $50,000.
These things are good for borrowing capacity:
- Higher incomes
- Bigger asset bases
- Lower spending habits
- Strong credit history
These things are bad for borrowing capacity:
- Lower incomes
- Smaller asset bases
- Higher spending habits
- Weaker credit history
To work out your income and spending, check your pay slips, bank statements and credit card statements. If your spending exceeds your income, you won’t qualify for a car loan. If your income exceeds your spending, you might qualify for a car loan.
The ‘gap’ between your income and spending is what you would use to repay the car loan. Once you know what that number is, you can use a car loan calculator to get a rough idea of how much you might be able to borrow.
How do you calculate the interest rate for a car loan?
The great thing about a car loan calculator is that it does all the maths for you. One important point to note is that at the start of your car loan, a relatively high share of your monthly payments goes towards interest, while a relatively low share goes towards repaying the principal.
However, the closer you get to the end of the loan, the less your monthly payments are allocated to interest and the more they’re allocated to principal. That’s because interest the price you pay for borrowing the principal; so the lower your outstanding principal, the less you get charged in interest.
For example, imagine you take out a $30,000 car loan with a five-year loan term and a fixed interest rate of 10.00 per cent. You would be required to make 60 monthly payments during the life of the loan. Each payment would be $637.41 – but as the table shows, the relationship between the principal and interest would change:
As the table shows, the lower your principal, the less you get charged in ‘money fees’ (or interest). So if your car loan allows you to make additional repayments and reduce the principal ahead of schedule, the earlier you can close the loan and the less you’ll ultimately pay in interest.
Will I be penalised if I repay my car loan early?
Some lenders will slug you with early repayment charges if you pay off your car loan ahead of schedule. However, some lenders won’t. So this is something you should check before signing up for a car loan. Don't forget to use a car loan calculator before applying for a loan, because this will help you understand your repayment capacity.
What is a balloon payment?
A balloon payment is a one-off lump sum you pay at the end of a loan. Some lenders will give you the option of making lower repayments on your car loan in return for making a balloon payment. Generally, a loan with a balloon payment will cost more over the life of the loan than one without.
Should I get a car loan through a dealer?
The big advantage of dealer finance is convenience. Instead of having to visit a car dealer and a lender or broker, consumers who opt for dealer finance only have to deal with one party. For some people, that is a big benefit.
Convenience, though, comes at a cost. Consumers who take out dealer finance often get less flexible car loans and end up paying more over the life of the loan, compared with consumers who work directly with a lender or take out a loan through a finance broker.
Another disadvantage of dealer finance is that often applies to a more limited range of makes and models than are available to consumers who take out car loans via a lender or broker. Plus, you might feel pressured into accepting an offer then and there, instead of taking time to think it over.
Make sure you punch some numbers into a car loan calculator before you sign up for dealer finance. That way, you won't lock yourself into a loan that you can't afford. Don’t be afraid to tell the car dealer that you need at least 24 hours of thinking time before signing up for a loan.
What kind of car should I buy?
Before you take out a loan to finance your car purchase, you need to figure out what vehicle you want to purchase. And before you choose one of the thousands of makes and models on offer, you should consider whether you want a new or used car.
There are four main reasons why some buyers prefer new cars to used cars:
- They come with a warranty
- They have the latest technology
- They’re more fuel-efficient
- They’re less likely to suffer mechanical problems
But used cars also have four advantages over new cars:
- They’re cheaper
- They depreciate more slowly
- You have more room for negotiation
- You have a greater range of models to choose from
What should I consider when comparing car loans?
The obvious things to consider when comparing car loans are the advertised interest rate and the comparison rate. But don’t stop there. You should also take the time to consider the car loan’s features, which can often make or break a loan.
During your research, take the time to consider how often you’re likely to use each of the car loan’s features, as you might have to pay extra for features you don’t need. These extras could include insurance options, extended warranties or shortfall cover.
Watch out for fees. Numerous lenders charge establishment fees to cover the creation of your loan documentation. Ongoing fees may also be charged from month to month, in addition to the interest, which can make your loan significantly more expensive in the long run.
To get a better idea of the true cost of different car loans, look at each loan’s comparison rate, which combines the advertised interest rate with the lender’s standard fees and charges. Remember, though, that some loans include non-standard fees and charges that aren’t included in the comparison rate.
If you’d like to be able to pay off your car loan ahead of schedule and reduce the total interest you pay, check whether your lender charges fees for making extra repayments or for exiting the loan early, as these can make this option less affordable.
A car loan with a redraw facility can be helpful if you’re trying to pay your car loan off ahead of time but are concerned about committing too much of your money to the loan. Once you’re ahead of your repayment schedule, a redraw facility can be used to withdraw money from your car loan’s surplus balance, if required.
If you’re buying a car, it’s important to organise a report from the Personal Property Securities Register (PPSR). Formerly known as a REVS check, this report will determine whether the vehicle is being sold with a financial encumbrance (money owed by a previous owner). Some lenders will offer to do this check on your behalf – possibly for a fee.
How loan sizes affect car loan repayments
For a loan at 9.00 per cent over five years…
|Loan size||Monthly repayments||Total interest||Total repayments|