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.
|Advertised Interest Rate
||$5/month = $300/total
||$10/month = $600/total
|Total Amount to Pay
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.