How to compare car loans
Comparing car loans can make a big difference to your car finance decision. Compare car loan features and calculate the repayments on low rate car loans to make sure your choice matches your needs and budget.
Whether you're looking to buy a new or used vehicle, it makes sense to shop around. Check the classifieds and dealerships, compare vehicle makes and models, and keep your options open to find that perfect set of wheels.
The same principle applies when it comes to car finance. It's worth looking at the car loan market and comparing interest rates from different Australian lenders, as well as car loan features and extras. You can compare many new car loans in one place at RateCity.
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How much should I borrow with a car loan?
Before you start to compare car loans, it's a good idea to think about how much money you'd like to borrow, how much time you’ll need to pay it back, and how much you can afford to repay each month.
It's tempting to buy the best car possible and borrow the largest sum you can afford. But it might be more sensible to choose a more modest vehicle so your car loan repayments are easier to manage. Some lenders offer different loans for new and used cars, so compare your options before choosing a vehicle.
Should I borrow 100% of the purchase cost?
If your loan amount is less than 100% of the purchase cost, you might be offered a lower interest rate.
This is similar to how you can save a bit of money when buying a home. If you have a house deposit worth 20% of the price, you'll avoid having to pay for lender’s mortgage insurance. In a similar way, providing more money upfront for a new car might help you get a lower interest rate on a car loan.
When it comes to working out the length of your car loan term, remember that the shorter your loan term, the higher your fortnightly or monthly repayments will be. But if you go for a longer loan term with smaller repayments, you'll likely pay back more in interest costs over the life of the loan. You can use RateCity's Car Loan Calculator to compare potential repayment costs of different loan terms.
New vs used cars
However, because used cars tend to be cheaper than new cars, you shouldn't need to borrow as much money to start with.
How to compare car loan interest rates
The most obvious place to start comparing car loans is with the interest rate. This is the extra percentage you'll have to pay on top of the amount you borrowed, which is known as the principal.
Generally, the lower the interest rate, the cheaper the deal. Just remember the fees and charges when calculating the loan’s total cost.
When researching interest rates, you should also look at different comparison rates. The comparison rate combines a loan's advertised interest rate with its standard fees and charges, giving you a more accurate idea of its overall cost.
Watch out for any extra fees and charges that aren’t included in the comparison rate as they can drive up the total cost of the loan.
Fees and charges
Some 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
How to compare variable and fixed car loans
When you're comparing different types of car loans, you will need to choose between a fixed rate or variable rate car loan.
Fixed rate car loans
Choosing a fixed rate car loan means agreeing in advance to pay a set amount of interest with each monthly repayment. Because 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.
Variable rate car loans
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.
How to compare secured and unsecured car loans
Many car loans are secured, which means 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 loans don't require security, so you can use them to buy a greater variety of vehicles. However, because unsecured loans are riskier to lenders, they often have higher interest rates than secured car loans do.
Other types of car loans
There are a number of other types of car loans on the market, each of which meet specific financing requirements. These include:
- Chattel Mortgage: a specialist car finance option for business use
- Operating Lease: a longer-term car rental arrangement, which involves a company leasing a car for an extended period of time
- Commercial Hire Purchase: involves a finance company buying a car on your behalf and letting you use it in return for regular rental payments
- Car Lease: you rent the car for a pre-determined period of time and at the end of the lease, you either return it or buy it
- Novated Lease: similar to a car lease, but with a more complicated ownership structure, as you acquire the car from a second party (usually an employer) which in turn leases it from a third party (a finance company)
What to look for when comparing car loans
- Early exit/extra repayment penalties: 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.
- Personal Property Securities Register (PPSR) check: If you're buying a used car, it's important to check if it has money owing on it from a previous owner, also known as a financial encumbrance. You can organise a PPSR check (formerly known as a REVS check) before getting your car loan. Your lender may be able to handle this for you, though they may charge a fee.
- Deposit: Unlike a home loan, you don't always need a deposit for a car loan. If your credit history is good but you don’t have much in savings, you may still qualify for a low-deposit or no-deposit car loan. As these loans are riskier to lenders, they tend to have higher interest rates.
- Terms and conditions: As with any financial product, it's important to examine the terms and conditions of every car loan you consider to understand all the fees and costs involved, as well as the features.
How to compare car loans in Australia
RateCity compares loans from a range of different lenders all in one place, so you can look at them side by side. This can save time and quickly deliver the information you need to make a more informed decision.
Once you've looked at the available rates, and have compared other features, costs and benefits, you can narrow down your car loan shortlist before submitting a loan application.
Compare the options, find the best car loan for you, and get on the road!
For information specific to your personal financial situation, consider reaching out to a financial advisor.
Business Finance Writer
Rachel Wastell is an award-winning writer with a knack for translating complicated subjects. She is a strong environmental advocate, and is as passionate about the planet as she is about finance and open education. Writing professionally for almost ten years, Rachel's work has been published across the Australian media landscape including the Australian Financial Review and The Guardian, and she regularly contributes to Business Insider and Lifehacker.