Looking to get back on the road, but not sure a fixed rate car loan is the right choice?
Comparing fixed rate car loans is tricky, as lenders have different terms, fees and charges to consider.
If you're in the market for a car loan, get all the facts before you act and use the RateCity website to compare loan features and fees.
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Lenders getting increasingly personal with their car loans
A growing number of car loan lenders are offering personalised interest rates.
What is a fixed rate car loan?
Fixed rate car loans lock the borrower into the same interest rate and repayments over the life of the loan term.
Fixed rate loans can help you avoid any financial stress should interest rates rise. As you’re locked into a set rate, the lender can’t make any unexpected changes to your repayments.
Is it better to have a variable or fixed rate car loan?
The best car loan for you will not be the best for someone else, as it depends on your financial situation. If you’re looking for security, then you may prefer the certainty of a fixed rate car loan. To find the lender with the best car loan, whether variable or fixed, you need to compare the loan type, account fees and interest rates.
Benefits of a fixed rate car loan
The main advantage of a fixed rate car loan is the certainty it offers and protection against future rate rises. Borrowers know exactly what their repayments will be, and that amount is locked in for the life of the loan.Set repayments provide a level of assurance that variable rate loans just can't.
Benefits of a variable rate car loan
As the interest rate is variable, the lender can adjust it at any time. The main advantage of this is that your repayments may fall if your lender cuts their interest rates, reducing your interest costs. Variable car loans may also offer more flexible features, such as the ability to make extra repayments or pay out the loan early, features that are typically not available on fixed loans.
Disadvantages of a fixed rate car loan
While the benefit of a fixed rate car loan lies in its pre-agreed repayment structure, this is also a disadvantage. If your lender cuts interest rates, this will not be passed on to you if you have a fixed rate loan, only to borrowers on variable loans. In addition, interest rates on fixed loans may also be higher than rates on variable loans given the certainty they offer. Much like insurance, you need to pay a little extra to protect against rising interest rates.
Fixed rate loan may also have more restrictive conditions than variable loans. For example, repaying your loan early may attract financial penalties, to ensure the lender recoups the loss of interest that an early exit brings.
Disadvantages of a variable rate car loan
The main disadvantage of a variable rate loan is that the lender can raise the interest rate on your loan at any time. A sudden, unexpected increase in your repayments could exceed your budget, especially if you’re on a tight one.
How do interest rates work for car loans?
Interest rates are charged by lenders in return for the risk they take on when they lend money to individuals. The example below shows how interest rates can be calculated on a car loan with a 7 per cent interest rate and a monthly repayment of $400.
The interest cost on car loans is usually calculated daily and accrued monthly. As this is a principal and interest rate calculation, it does not include other fees or charges such as ongoing management fees, early exit fees, or late payment fees. These may apply to your car loan, so be sure to check this before signing anything.
|Month||Starting Balance||Interest Rate||Daily Calculated Interest||Monthly Interest||Monthly Payment||End of Month Balance|
|January||$5000.00||7%||7% ÷ 365 = 0.02%
0.02% x 5000 = $0.96
|$0.96 x 31 = $29.76||$400||$5000 + $29.76 - $400
|February||$4629.76||7%||7% ÷ 365 = 0.02%
0.02% x 4629.76= $0.89
|$0.89 x 28 = $24.86||$400||$4629.76 + $24.86 - $400 = $4254.62|
|March||$4254.62||7%||7% ÷ 365 = 0.02%
0.02% x 4254.62= $0.86
|$0.86 x 31 =$25.29||$400||$4255.40 + $25.29 - $400 = $3880.69|
Note: Different banks will calculate interest rates over different times, so be sure to check with your preferred lender how they calculate them.
Types of fixed rate car loans
Fixed rate car loans come in two main forms, secured and unsecured.
Secured fixed rate car loans
Most car loans on the Australian market are secured by the vehicle purchased with the loan. This means that the car you buy is used as security against the loan, and your lender can repossess your vehicle if you do not make your repayments. The lender sees this type of loan as lower risk compared to an unsecured loan, as they can sell the car to recoup their losses if you default on your repayments.
Some lenders will only offer secured loans for certain makes and models, or cars under a certain age, to further reduce their financial risk.
Unsecured fixed rate car loans
If the car you’re buying doesn’t qualify for a secured loan, or if you prefer not to risk losing your vehicle, some lenders offer unsecured car loans. Unsecured loans do not require collateral against the loan, such as the car. However, as they represent greater risk to lenders, unsecured loans typically have higher interest rates than those on secured loans.
Unsecured fixed rate car loans usually have stricter eligibility criteria too, such as more stringent affordability tests and may only be offered to high income earners with a steady income stream.
What to look out for with fixed rate car loans
A fixed rate car loan with a low advertised rate may seem to be the best option. However, it’s important to look further than the interest rates to calculate the total cost of your fixed rate loan.
The car loan with the lowest interest rate is not always the cheapest
Even if a fixed rate car loan has a low interest rate, you’ll most likely still pay fees and charges in addition to interest costs. This could make a low-interest rate car loan ultimately more expensive than a higher-interest rate car loan with lower fees and charges.
Let’s look at an example. Claire wanted to borrow $11,500. Lender A offers an 8% interest rate, with only a monthly fee of $5 and Lender B offers a 6% interest rate, but has multiple fees and charges throughout the loan term. Lender A actually works out $99 cheaper than Lender B, despite the 2% lower advertised interest rate.
|LENDER A||LENDER B|
|Loan Term||5 years||5 years|
|Advertised Interest Rate||8%||6%|
|Ongoing Fees||$5/month = $300/total||$10/month = $600/total|
|Total Amount to Pay||$14,291||$14,390|
Source: RateCity Car Loan Calculator
Check the comparison rate
From July 2003, the Australian government made it mandatory for lenders to display a comparison rate alongside an advertised interest rate. This comparison rate includes most fees and charges on a loan, and bundles this with the advertised rate to give an overall interest rate, called the comparison rate. This is a helpful guide to borrowers as it gives a more accurate understanding of what the loan’s total cost will be.
However, it’s important to note that even a car loan with a low comparison rate may have additional non-standard fees that are not included in this rate. Using the comparison rate as a guideline to narrow down your choices is wise, but make sure to ask about all the fees and charges on a loan before signing on the dotted line.
Hidden fees and charges
Fixed rate car loans offer a stable, simple repayment system. However, extra fees such as break costs may apply if you try to repay your car loan earlier than agreed. If you find yourself with extra funds available, and want to clear your debt with your lender, make sure you look at the fees associated with additional car loan repayments. Repaying early may attract financial penalties, to ensure the lender recoups the loss of interest that an early exit brings.
Variable rate car loans tend to have more flexible arrangements than fixed car loans. If you want to make extra repayments, you can often do these without charge. A variable rate loan could be a more suitable option if you want flexibility and the opportunity to repay your loan early without financial penalties applying.
Before you sign up to a fixed rate car loan, check the lender’s terms and conditions, their product disclosure statement and loan fact sheets. Only with all the financial information can you make an informed decision on which loan will work best for you.
High LVR on your car loan
A Loan to Value Ratio (LVR) is the percentage of money you borrow for a car loan, in comparison to the vehicle’s value. Some lenders have 100% loans available, where you borrow the full value of the car and don’t need a deposit. This may seem appealing, but often, a higher interest rate is charged by lenders on such a loan compared to one with a lower LVR to account for increased financial risk.
Your credit history is a record of the dealings you’ve had with credit providers such as banks, credit card companies, mobile phone companies and internet companies. Your credit history records how successfully you’ve managed your repayments. It also records how many credit applications you’ve made and how many of those were rejected.
Credit providers refer to your credit history when deciding whether or not to extend you credit. Missing repayments is a bad sign; making too many applications or having applications rejected can also be a bad sign.
Credit infringements can remain on your credit history for five years – or seven years for serious infringements.
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.
There are four different ways you can get a car loan. You can go straight to a lender. You can get a finance broker to organise a car loan for you. You can get ‘dealer finance’ – which is when the car dealer organises a car loan for you. Or you can organise your own car loan through a comparison website, like RateCity.
Whichever method you choose, you will need to provide proof of identification, proof of income and proof of savings. So you may be asked for any combination of passport, driver’s licence, bank statements, payslips, tax returns and utility bills. You might also be asked to provide proof of insurance.
There’s no set number. That’s because borrowing capacity differs from person to person, as well as lender to lender.
Lenders don’t give out car loans unless they’re confident they’ll be repaid. Each person is different, so the amount of money one person can successfully borrow will differ from another person’s number. Also, each lender uses its own formulas to calculate borrowing capacity – so Mr & Mrs Smith might find that while Lender X will give them a car loan for $20,000, Lender Y will offer only $18,000.
A car loan, also known as vehicle finance, is money that a consumer borrows with the express purpose of buying a vehicle, such as a car, motorbike, van, truck or campervan. Car loans can be used for both new and used vehicles.
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.
A car loan calculator is an online tool that helps consumers understand how much they would have to repay under different scenarios. Consumers can create these different scenarios by entering different borrowing amounts, interest rates, loan terms and repayment schedules into the car loan calculator.