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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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 loanwhether 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 risesBorrowers know exactly what their repayments will be, and that amount is locked in fothe 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 disadvantageIyour lender cuts interest rates, this will not be passed on to you if you have a fixed rate loanonly to borrowers on variable loansIn 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 individualsThe 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  
= $4629.76 
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 lendersunsecured loans typically havhigher 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 exampleClaire 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 Amount $11,500 $11,500
Loan Term 5 years 5 years
Advertised Interest Rate 8% 6%
Monthly Repayments $233 $222
Ongoing Fees $5/month = $300/total  $10/month = $600/total 
Other Fees $0 $450 
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 rateThis 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. 

What is a fixed-rate loan?

A fixed-rate loan is one where the interest rate remains constant for an agreed amount of time. For example, if you take out a five-year fixed-rate loan at 8.75 per cent, the lender is obliged to leave your interest rate at 8.75 per cent for at least five years. By contrast, if you take out a variable-rate loan at 8.75 per cent, the lender can change the interest rate whenever it wants.

What is a variable-rate loan?

A variable-rate loan is one where the lender can change the interest rate whenever it wants. For example, if you sign up for a variable-rate loan at 8.75 per cent, the lender might change the interest rate to 8.90 per cent the month after and then 8.65 per cent the month after that. By contrast, if you take out a five-year fixed-rate loan at 8.75 per cent, the lender is obliged to leave your interest rate at 8.75 per cent for at least five years.

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 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.

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 a comparison rate?

The comparison rate is known as the ‘real’ interest rate you have to pay – unlike the advertised interest rate, which is often an artificially low number. That’s because the comparison rate includes both the advertised rate and the associated fees. According to the industry standard, comparison rate calculations are made on the assumption that the car loan will be for $30,000 over five years.

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.

Does having a guarantor on a car loan lower your interest rate?

While it’s not necessarily a guarantee, having a guarantor on your car loan will improve your chances of having your application accepted, and may mean that you are able to attain a lower interest rate loan.

Having a guarantor with excellent credit history and/or is a property owner reduces the risk to the lender because the payments are guaranteed by someone who is considered to be financially secure and reliable.

As such, even if your credit history isn’t perfect, a guarantor may be able to help you secure a lower rate from some lenders.

What is a balloon payment?

Some lenders will offer borrowers reduced monthly repayments in return for a one-off lump sum – or balloon payment – that the borrower has to pay at the end of the loan. Generally, the total repayments on a loan with a balloon structure will be higher than a loan without.

What is a car loan calculator?

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.

What is proof of income?

Before giving you a car loan, lenders will ask for proof of income – documentary evidence that you earn as much as you claim you earn. Lenders will typically want some combination of tax returns, pay slips and bank statements. The reason lenders want proof of income is because they want to be sure you have the means to repay the car loan.

What is CTP insurance?

CTP insurance, also known as compulsory third-party insurance or a green slip, is compulsory if you want to register a vehicle in Australia. If you’re responsible for a car accident, your CTP insurance will be used to pay any compensation due to anyone who might be injured or killed. However, CTP insurance doesn’t cover you for vehicle damage or theft.

What is trade-in value?

The trade-in value is the price you could realistically charge if you were to sell your car to a dealer while buying a replacement vehicle. Generally, a car’s trade-in value is less than its market value. That’s because the dealer has no interest in buying your car unless it can make a profit – which can only be done if the dealer has room to increase the price.

What is a refinance?

A refinance is when you swap one car loan with another. For example, you might take out a car loan with Lender X because it is the best on the market at the time – but two years later, you might switch to Lender Y because you discover that it now has the best loan. Conditions and fees often apply when you refinance.

What is an upfront fee?

An upfront fee is a one-off fee that many lenders charge when you take out a car loan.

What is a loan-to-value ratio?

The loan-to-value ratio, or LVR, is a percentage that expresses the amount of money owed on the car compared to the value of the car. For example, if you take out a $15,000 loan to buy a $20,000 car, you have a loan-to-value ratio of 75 per cent. Loan-to-value ratios change over time as you pay off your loan and your car depreciates in value. For example, two years later you might now owe $10,000 on your car, which might now be worth $15,000. In that case, although there would still be a $5,000 difference between the size of the outstanding loan and the value of the car, the loan-to-value ratio would now be 67 per cent.

What is a pre-approval?

A pre-approval is a formal document that indicates how much a lender is willing to lend to a consumer – once that person has found the car they want to buy. A lender will assess a borrower’s credit history and financial circumstances before issuing a pre-approval. However, lenders are under no obligation to follow through on pre-approvals, so pre-approvals should be seen as statements of intent rather than rock-solid guarantees.

What is a green slip?

A green slip, also known as compulsory third-party insurance or CTP insurance, is compulsory if you want to register a vehicle in Australia. If you’re responsible for a car accident, your green slip will be used to pay any compensation due to anyone who might be injured or killed. However, a green slip doesn’t cover you for vehicle damage or theft.

What is a car loan?

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.

What is a novated lease?

A novated lease is a car lease that is ‘novated’, or transferred from one party to another. Novated leases are often used when companies provide a car as part of a salary package. The employer signs for the lease and makes the lease payments, but the employee assumes the responsibility of looking after the car. While most car leases involve two parties, novated leases involve three – employer, employee and financier.