How to compare car loans
Whether you’re looking to buy a new or used car, it makes sense to shop around, compare makes and models and keep your options open. To find the best car to suit your household, it’s often worth scouring the classifieds and wandering through multiple car yards until you find that perfect set of wheels.
The same principle applies when it comes to sorting out your car’s finance. It’s always worth looking at the car loan market and comparing not just the interest rates from different lenders, but the features and extras that could make or break your choice of car loan.
You can compare a variety of different car loans in one place at RateCity, but it’s worth checking that you’re using the right information to make the most accurate comparison. That way, you’ll put yourself in the best position to nail your purchase and borrowing.
How much should I borrow with a car loan?
Before you start to compare car loans, have a think about how much money you’d like to borrow, how much time you’d like to pay it back, and how much you can afford to pay back per month.
While it’s tempting to borrow the largest sum you can reasonably afford and pick up the best car possible, it might be more sensible to opt for a slightly more modest vehicle so your car loan repayments are more manageable.
When working out the length of your car loan, remember that the shorter your loan term, the higher your repayments each month. However, if you go for a longer loan term with smaller monthly repayments, you’ll find yourself paying more in total interest over your loan’s lifetime.
The pros and cons of fixed-rate car loans
The interest rate of a fixed-rate loan is guaranteed to stay the same during the fixed-rate period. That makes it really easy to budget. It also means that you are protected if interest rates rise during the fixed-rate period. However, if interest rates fall, you’ll have to keep paying the higher rate.
Also, are you buying a more-expensive new car or a less-expensive used car? Some lenders offer different loans for new or used cars, making it a good idea to compare your available options before deciding which type of vehicle to purchase.
New cars tend to have greater resale potential than used cars. As a result, lenders often regard a loan for a used car as a greater risk and so will often charge a higher interest rate. Of course, because used cars tend to be cheaper than new cars, you shouldn’t need to borrow as much money.
How to compare car loan interest rates
The most obvious place to start comparing different car loans is the interest rate, which is the extra percentage you’ll have to pay back on top of your loan repayments. Generally, the lower the interest rate, the cheaper the deal, although you also have to consider fees and charges when calculating the total cost of the loan.
When researching interest rates, don’t just look at the headline interest rate. You should also look at the ‘comparison rate’, which is an approximate figure that combines a loan’s advertised interest rate with its standard fees and charges, expressed as a percentage.
This comparison rate can provide a more accurate representation of a loan’s overall cost than the interest rate alone, and can serve as a useful guideline for comparing similar car loans, helping you determine which may be best suited to you and your finances.
That said, comparison rates may not include all fees, nor will they account for extra features that could add further value to a loan. You can usually use comparison rates to help you narrow down your car loan choices, before you take a closer look at what each one has to offer.
How to compare variable and fixed car loans
Choosing a fixed-rate car loan means agreeing in advance to pay a set amount of interest on top of each monthly repayment. Because your interest rate is locked in from the start, your monthly repayments will always be the same, which is nice and simple to slot into an existing budget, especially if you want to keep your finances stable.
The downside of fixing the interest rate on your car loan is that if your lender cuts its interest rates, you won’t get to enjoy the savings. Plus, if you’re locked into a fixed car loan plan, you may lose some flexibility in your repayment options.
If you choose a variable-rate car loan, your lender has the right to change the interest rate at any time. If there’s a rate cut, your repayments will go down, saving you money. But if there’s a rate rise, your repayments will go up, costing you more.
This can sometimes make budgeting for variable-rate car loan repayments a little bit tricky when compared to a fixed-rate car loan, though many variable rate car loans tend to have more flexible arrangements when it comes to making your repayments.
How to compare secured and unsecured car loans
Many car loans are secured loans, where 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 so it can recover its losses. This is the lender’s ‘security’.
While this extra financial security means that lenders usually offer lower interest rates for secured loans, some lenders only offer these loans for particular car models, or for cars under a certain age, to better guarantee their finance against the vehicle’s value.
Unsecured loans, on the other hand, don’t require this same level of security, and thus can typically be taken out for a greater variety of vehicle types. However, to make up for the added risk to the lender, unsecured car loans often have higher interest rates than their secured counterparts.
What type of vehicles can I buy with a car loan?
- Passenger vehicles
- Light commercial vehicles
- Light rigid trucks
- Heavy rigid trucks
- Articulated trucks
What to look for when comparing car loans
Comparing car loans can be a tricky business, because there are so many different options to check and calculations to make. We’ve mentioned a few of those above – and here are some other things you should be aware of when comparing car loans:
- Early exit/extra repayment penalties
- Redraw facility
- Personal Property Securities Register check
Early exit/extra repayment penalties – More often found on fixed-rate car loans, but sometimes appearing on variable rate car loans, these fees may be charged if you make extra payments on your car loan or exit the loan early, to make up for the interest payments the lender will be missing out on.
Redraw facility – If you’re able to easily make extra payments onto your car loan, a redraw facility will allow you to take that money back out just as easily, freeing it up for when you need some extra flexibility in your finances, subject to the lender’s terms and conditions.
Personal Property Securities Register check – If you’re buying a used car, it’s important to check it for any ‘financial encumbrance’, or money still owing on it from a previous owner. This can be done by doing a Personal Property Securities Register (formerly REVS) check as part of organising your car loan.
Deposit – If your credit is good but your savings aren’t as large as you’d like, you may be able to qualify for a low-deposit or no-deposit car loan. As these loan types represent greater financial risk to lenders compared to the other available options, they tend to have higher average interest rates.
How to quickly compare car loans
RateCity puts car loans from a range of different lenders all in one place, so you can compare what they offer side by side, saving yourself time and hassle while you get 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 being offered, you can narrow down your car loan shortlist. Compare the options, find the right car loan for you, and get yourself on the road!