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Why should you compare car loans?

If you’re considering taking out a car loan in Australia, you may be wondering why you should even compare your options. After all, won’t your childhood bank just give you the best car loan because you’re a loyal customer?

Unfortunately, this is a common misconception as no two car loans, or two borrowers, are the same. While your bank may offer competitive car loans, there are a lot of factors you’ll need to choose from that will impact the overall cost and any features attached. Plus, your own personal financial situation and credit history may affect the car loan you’re offered, as well as whether you’re approved full-stop.

So, before you visit your local dealership, you'll want to ensure you’re getting the right deal for your car goals and financial situation. Comparing your loan options is one of the best ways to do just that.

What are the pros and cons of a car loan?

There are several benefits as well as risks to consider when comparing car loan options.

Benefits of a car loan

  • Nab your ideal car – Car loans allow you to afford the car you need when you need it.
  • Debt cleared – If you meet your regular repayments, you know that in a matter of years you will have paid off your car loan and own the vehicle outright.
  • Build credit rating – Being approved for and repaying a car loan in full is one way you may be able to boost your credit score.

Risks of a car loan

  • Financial commitment – A car loan is a serious financial commitment you need to consider carefully before entering. If you miss repayments or default on the loan you may lose the vehicle and hurt your credit report.
  • Interest and fees – You’re not just paying for the value of the vehicle. Car loan lenders will charge you interest on your loan amount, as well as potential upfront and ongoing fees.
  • Additional costs - There are a range of additional costs associated with owning a car that you'll need to factor into your budget, including stamp duty, car insurance, registration, petrol and more. 

How do you compare car loans?

One of the best ways to compare car loans is to look at the key components of the loan and choose which option best suits your goals and financial needs.

When it comes to comparing car loans, it’s important to make sure you’re comparing apples with apples. For example, secured car loans must be compared with other secured car loans, and unsecured loans with other unsecured loans.

If you factor the following details into your car loan comparison, you’ll likely be better equipped to make a fair comparison and work out which car loan best suits your needs.

Car loan factorAbout
Interest ratesThe interest rate charged is arguably the most significant cost associated with a car loan. The higher the interest rate, the more you will pay over the life of the loan, and vice versa for low-rate car loans.
Comparison ratesComparison rates combine a loan's advertised interest rate with some of its standard fees and charges. This gives you a more accurate idea of a car loan’s overall cost, based on a 5-year, $30,000 car loan. This can help you better compare car loan options as you’ll be able to understand the “true” cost of a loan.
Rate typeChoosing a fixed rate car loan means agreeing in advance to pay a set amount of interest with each monthly repayment. As your interest rate is locked in from the start of the loan, your monthly repayments will always be the same, which can help make budgeting much simpler. The downside of fixing your car loan interest rate is that if your lender cuts rates, you won't get to enjoy the savings. Plus, if you're locked into a fixed car loan plan, you may lose some repayment flexibility.

If you choose a variable rate car loan, your lender could change the interest rate at any time. If there's a rate cut, you'll pay less interest, and your repayments will go down. But if there's a rate rise, you'll pay more interest, and your repayments will go up. This can make it trickier to budget for a variable rate car loan than for a fixed rate car loan, though many variable rate car loans offer flexible repayment options and other features.

Secured vs unsecured loansSecured car loans - The money you borrow is guaranteed against the value of an asset – usually the car you're purchasing. If you don't make your repayments, the lender may seize your car to recover its losses. This financial security means lenders often offer lower interest rates for secured loans. However, some lenders only offer these loans for certain car models, or for cars under a certain age, to ensure the car's value is sufficient to secure the loan.

Unsecured car loans - Do not require security, so you can use them to buy a greater variety of vehicles. However, as unsecured loans are riskier to lenders, they may come with higher interest rates.

New car vs used carNew cars tend to have greater resale potential than used cars. This means lenders often consider loans for used cars as higher risk and will therefore charge higher interest rates.

However, because used cars tend to be cheaper than new cars, you shouldn't need to borrow as much money to start with. Keep in mind that some lenders may cap the age of used car eligibility at 5-7 years.

FeesSome of the types of fees and charges that may apply include:
  • Application fee
  • Establishment fee
  • Early repayment fees
  • Monthly fees or account keeping fees
  • Exit fees payable at the end of the loan term
  • Other ongoing fees
FeaturesExtra repayments: Paying extra on a car loan can help you get ahead on your repayments, or even pay your car off early, which can reduce the interest you’re charged. However, your lender may charge fees for these features.

Redraw facility: If you make extra car loan repayments, a redraw facility will allow you to take this money back out if you need it. Just check the lender's terms and conditions.

Can your credit score affect how much you pay?

Yes, your credit score may impact your car loan comparison and how much you pay on a car loan, as it is a key part of a lender’s eligibility criteria. 

Car loan lender eligibility criteria generally dictates that having a good to excellent credit score is preferred. Meaning, you may have a higher chance of approval and be offered a lower interest rate if you have a higher credit score. If you're hoping to nab one of the lowest interest rate loan offers on the market, having a bad credit score may prohibit you from being approved. 

Therefore it’s worth checking your credit score before you apply. After all, if your car loan application is rejected, this may further hurt your credit score. If you are struggling with bad credit you may want to work at boosting your credit score before you apply.

How to find the best car loan for you

Now you know the components and features you want included in your car loan, it’s time to compare your options. And one of the easiest ways to find the best car loan is to use comparison tools, such as tables, calculators and more.

Comparison tables

Comparison tables can be a great place to start when comparing car loan options. They allow you to compare apples with apples, meaning you can view a range of loan options side by side, based on specific criteria you’ve chosen.

Simply enter the amount you want to borrow and the loan term, and filter down your options based on the details you wish to prioritise, such as secured car loans or ones with no early exit penalty. Then you can compare your options to see how they stack up on several factors, including interest rate, monthly repayments, and Real Time RatingsTM score.

Car Loan Calculator

You have a shortlist of options but you’re not sure which one is the right fit for you. Now may be the time to see how potential loan repayments may suit your budget with the Car Loan Repayment Calculator. Enter in the car loan details and repayment frequency (weekly, fortnightly or monthly repayments) to see how much loan repayments potentially may be. Plus, you'll be able to see the total cost of the loan including interest with this calculator.

Real Time RatingsTM

If you’re still not sure which car loan to choose from, it may be worth looking at its Real Time RatingsTM score. Real Time RatingsTM is RateCity’s world-first rating system that ranks personal loans based on your individual requirements. Each car loan is given a score out of five, based on loan costs and flexibility. Unlike other comparison pages which rank their products once or twice a year, Real Time RatingsTM results are calculated live, so they are up to date as possible.

What other types of car finance options are there?

If you’re shopping around for car financing, it’s worth knowing what other options, including leasing, you may have outside of a car loan – especially if you plan on using the vehicle for business purposes. These car finance options include:

  • Chattel Mortgage: A type of secured car finance option but for business use primarily.
  • Operating Lease: Like a long-term car rental arrangement, the company leases a car for an extended period.
  • Commercial Hire Purchase: Closer to a rent-to-buy arrangement, this typically involves a finance company purchasing the vehicle on your behalf and letting you use it in return for regular rent payment. After several payments, you may own the car.
  • Car Lease: Like a commercial hire purchase, but at the end of the lease you may choose to either return the car or buy it.
  • Novated Lease: Like a car lease, but with a more complicated ownership structure. You acquire the car from a second party (usually an employer) which in turn leases it from a third party (a finance company).
  • Balloon payment: You still opt for a car loan, but the repayment structure is much different. Payments are divided up so that they begin smaller, with the borrower paying a larger portion of the loan (say 25%) at the end.

Can you use a personal loan for car financing?

A car loan is a type of personal loan that is specifically designed for the purchase of a vehicle. But not every borrower may want to use a car loan to finance a vehicle purchase. 

This may be because car loans will typically be secured with the vehicle used as collateral. Which means if you were to default on the loan, the car would be seized as collateral. Plus, lenders have strict eligibility criteria around the age of older “used” cars, which can make car loans tricky if you’re purchasing a vintage car for example.

So, what other financial products are available? If you didn’t want to use a traditional secured car loan to purchase your vehicle, you may want to consider an unsecured personal loan. Unsecured personal loans do not require an asset to be offered as collateral and may not come with eligibility criteria around the make, model, or year of the vehicle you wish to purchase.

Keep in mind that unsecured personal loans generally come with higher-than-average interest rates than car loans or secured personal loans. This is because there is greater risk to the lender by not having this security attached to the 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.

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 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.

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.

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.

This article was reviewed by Personal Finance Editor Georgia Brown before it was published as part of RateCity's Fact Check process.

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