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Learn more about car loans

What is a fixed rate car loan?

A car loan is a type of personal loan that is taken out by a borrower specifically to buy a new car, used car or other eligible vehicle. Fixed rate car loans specifically lock the borrower into the same interest rate and repayments over the life of the loan term.

Fixed rate loans may 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. You may also benefit from simplified budgeting, as a fixed rate car loan means you're making the same repayments for the loan term. 

 

Is it better to have a variable or fixed rate car loan?

Whether you need a used car loan or a new 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 finance, whether variable or fixed, you need to compare the loan type, account fees and interest rates.

Benefits and risks of a fixed rate car loan
The main advantage of a fixed rate car loan is the certainty it offers in terms of repayments, and the protection offered 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.

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 may need to pay a little extra to protect against rising interest rates. 

Fixed rate loans 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.

Benefits and risks of a variable rate car loan 
As the interest rate is variable, the lender may 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.  

The main disadvantage of a variable rate loan is that the lender may 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. For a fixed car loan, the interest rate you are charged will not fluctuate over your fixed period.

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  
= $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 in Australia

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. Lenders usually see secured car loans as less risky compared to unsecured loans, 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. This means some used vehicles may not qualify under a personal loan lender's eligibility criteria.

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 steady income streams.

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.

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 lowest interest rate is not always the cheapest

Even if a fixed rate car loan has a lower interest rate than its competitors, you’ll most likely still pay fees and charges in addition to interest costs. This could potentially make a low rate car loan 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 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 rate. Comparing different comparison rates is a helpful guide to borrowers as it gives a more accurate understanding of what the total cost of the loan might 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.

  • Fees and flexibility  

Fixed rate car loans may 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 on a fixed loan. 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 may often be able to without charge. Loans that include the option to make additional repayments may also offer a redraw facility, so you may access any additional money you have paid on the loan if need be. 

Types of ongoing fees and charges that may be applicable include:

  • Application fees
  • Establishment fees
  • Extra repayment fees
  • Redraw fees
  • Early payout/Early repayment fees
  • Other service fees or account keeping fees
  • Car insurances, if purchased with the loan provider

 

  • 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 may be charged by lenders on such a loan compared to one with a lower LVR to account for increased financial risk. 

Before you sign up to a fixed interest rate car loan, check the lender’s terms and conditions, their Product Disclosure Statement (PDS), lending criteria and loan fact sheets. Only with all the financial information can you make an informed decision on which loan will work best for you.

How long can a car loan last?

The length of time you have to pay off your car loan, known as the loan term, generally ranges from 1 - 5 years, with some providers offering loans up to 10 years. 

When you take out a fixed rate car loan the interest rate is fixed for the entire length of the loan term. This is different to a fixed rate home loan, which typically last for 25-30 years, but offer 1- to 5-year fixed periods which may then revert to a standard variable rate. 

A car loan term will generally be a much shorter loan term than a mortgage, meaning it is more feasible for a lender to fix the interest rate for the duration of the term. Put simply, if your fixed rate car loan is on a 3-year term, the interest rate will be fixed for the whole 3 years.

While you will typically have the option to choose the loan term that best fits your budget, it's important to keep in mind that the longer your loan term, the more you will likely pay in interest charges over the life of the loan. 

On the other hand, your ongoing repayments may be lower on a longer loan term, regardless of your repayment frequency. Taking out a car loan on a 5-year term, for example, means the total loan amount will be spread over 5 years and repaid in regular instalments (weekly, fortnightly or monthly repayments) until the end of this period. In contrast, taking out a 2-year loan means you have a much shorter period of time to pay back that same loan amount, making the regular repayments higher.

When it comes to choosing between a shorter or longer loan term, the best option is the one that works for your individual needs. Consider using RateCity's Car Loan Calculator to get an estimate of how much your repayments might be on different loan terms.

Frequently asked questions

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.

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 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.

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 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.

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.

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.

How to get a chattel mortgage?

Both businesses and individuals may use a chattel mortgage, provided that the car is being used predominantly for business purposes. 

To apply for a chattel mortgage, you need to first consider your options and choose a suitable lender that meets your requirements. Once you have selected a lender, you can apply for the loan online by filling out a form. If the lender doesn’t offer an online application process, you can either call them or visit their nearest branch. 

After you’ve applied, the lender will ask you to supply documents that confirm your identification, income, job profile, etc. If everything is in order, most lenders will arrange the loan’s settlement, so all you need to do is pick up your car!

Can you get a chattel mortgage with bad credit?

Getting approval for a chattel mortgage with bad credit may be possible, given ‘chattel’ (usually a piece of equipment or car) is put up as security for the loan. That means if you fail to repay the loan, the creditor can recover the loaned amount by repossessing and selling the car or piece of equipment. This differs from unsecured car loans, where the asset is not tied to the loan and cannot be taken if you don’t meet the repayments. 

How much is your car worth?

If you already own a car, you could potentially bring down the cost by selling your car in the process. Before that happens, though, you’ll need to find out how much your car is worth.

One of the first places to find this value is to research the value of your current car, giving you an idea of roughly how much it’s worth in its peak condition.

There are plenty of websites that offer a free online valuation, allowing you to enter your car’s make, model, year, badge and description, with results listing a price guide based on both selling your car privately and through a dealership.

Of course, dealerships will try to profit on your trade-in by buying it for less than they can sell it, making it highly unlikely that you’ll get the same price selling a car to a dealer as you would selling a car privately.

However, private car sales can be costly and can take months to sell, making car trading more convenient with a guaranteed return, even if you may not be able to realise the total value of your car’s worth.

Remember that everything is negotiable. If the dealership is offering you less for your trade than you wanted, try to negotiate elsewhere to gain that money back. Start by negotiating on the price of the trade and then ask them if they can give you a further discount on your new car.

Should I service my own car?

There are also costs associated with vehicle ownership, such as paying for petrol and the obligatory ongoing maintenance. But should you cut down on costs by servicing your own vehicle?

If you’re considering getting out the tool box, spanner, and grease-laden towel, you need to carefully weigh up the risks and benefits. A trained mechanic will need to complete certain tasks, while you may be perfectly capable to handle other aspects yourself.

If you’re short on time, it may be worth paying for the convenience of a full vehicle service. However if you’re trying to slash your expenses, there are some basic maintenance tasks that you can complete yourself.

You should call a mechanic if you’re unsure about a vehicle maintenance task you’re about to take on. However there are a number of maintenance tasks that you may be able to complete with your own two hands including:

  • Replacing your car battery
  • Changing the oil
  • Replacing worn windscreen wipers
  • Replacing blown fuses

Remember to keep your car’s body in good condition, by washing and applying a protective wax on a regular basis, too.

Always check your car warranty agreement as some new car purchases come with an extended car warranty provided your services are conducted at the vehicle service centre where you purchased the car. In these circumstances, you may find the service fee is capped, alleviating some of the maintenance woes.

Can I get a discounted student car loan?

Being a student is tough enough, and while you might find the odd student discount on movies and technology, the same can’t be said about car loans, as you can’t really get a discounted student car loan.

Lenders make money on the interest and fees that they charge with loans, and the lowest interest and fees are given to the most reliable credit holders: people with excellent credit history.

As a student, you are unlikely to have enough on your credit report to warrant an excellent history. There are however, ways of getting a lower interest car loan if you can’t get an interest-free loan from the bank of mum and dad. One way of doing this may be through getting a guarantor car loan, which can get you a secured car loan by setting your parents up as guarantors.

How much can I get towards a new car as a single parent?

It really depends on your financial circumstances as to how much a lender will grant you towards a new car as a single parent. With most lenders, the smaller the loan you apply for, the higher your chances are of approval, so getting a cheaper car or adding some savings of your own, may be a valid option if you are struggling for approval on a car loan.

Can I get car finance on a pension?

 

Yes, as long as you meet basic criteria set out by lenders you are eligible for car finance. Your interest rate will be determined based on your financial history which can be found in your credit report, your income and any property you may own.

Comparing car loans for pensioners before you settle on one is important though, if you want to secure the best possible loan for your circumstances.

Can you terminate your chattel mortgage early?

Some lenders might provide you with an option to terminate your chattel mortgage early by repaying the full amount before the term is over. This way, your overall loan term decreases, therefore reducing the interest you need to pay.

It’s important to note that some lenders might charge a fee for you to pay off your chattel mortgage early. So, if you’re planning to terminate your chattel mortgage early, make sure you check if your lender allows you to do this. You should also determine if there are any additional fees or charges that you would need to pay to do this.

How does a chattel mortgage work?

A chattel mortgage is a loan issued to a person or a corporation for movable property. The movable property could include automobiles, yachts or boats, mobile homes, caravans or trailers. The term chattel in chattel mortgage refers to the movable property  used as collateral or security for the loan.

In a chattel mortgage, the loan is backed by 'chattel,' which the lender retains ownership of until the full loan has been repaid. Usually, the interest rate charged on such mortgages is lower. Repayments can also be fixed, which means you know exactly how much you’re repaying each month.

The most significant benefit for the lender is that the properties held as insurance are movable and can be sold easily if the borrower defaults.

Can an individual apply for a chattel mortgage?

Lenders offer chattel mortgages as a way to finance vehicles used for business purposes. Companies, as well as individuals, are eligible to apply for and receive chattel mortgages. The essential eligibility requirement is that the vehicle is used for business at least 51 per cent of the time. If you’re a tradesman and require a new utility vehicle to move equipment, you can apply for a chattel mortgage to finance the purchase.

A chattel mortgage for individuals is an option if you’re self-employed and have an Australian Business Number (ABN). You’ll also need to be registered for the Goods and Services Tax (GST) and have a clear credit history. Like all other loan types, you’ll have to prove your capability to service the loan to qualify for a chattel mortgage.

You’ll retain the ownership while the lender holds the vehicle as security for the loan in a similar way as they would a property with a home loan. You repay the borrowed amount in predetermined monthly instalments. Once you repay the entire loan amount, the lender will remove the mortgage.

What are the chattel mortgage tax benefits?

Buying a vehicle with a chattel mortgage can help to reduce your tax burden. The tax benefits you can get from a chattel mortgage include:

  • Goods and Services Tax (GST): GST is paid when you buy a new vehicle. You can claim the GST credit for vehicles and other goods or services used for commercial use. The GST paid when you buy the car is claimed as an Input Tax Credit if your business is registered for the GST in your Bank Activity Statement (BAS).
  • Interest payments: You can claim the interest paid on your chattel mortgage as a deduction in your annual tax returns.
  • Depreciation: The longer you own the vehicle, its value will depreciate, and you can claim this depreciation as a tax deduction.

You should consult an experienced tax professional for more information about chattel mortgage tax benefits.

How to apply for pre-approval of a car loan from RACV?

If you’re planning to apply for a car loan with RACV, the best way to start is by having a clear picture of your requirements. By getting pre-approval on your car loan, you’ll be able to go shopping for your new car with a definite budget that will help you narrow your search. Once you’ve decided to buy a car with the help of a loan, you may have even identified the type of car you would like to purchase, you can seek pre-approval on a car loan from RACV. 

You can apply for pre-approval by filling out a form online and uploading the relevant documentation regarding your identification, income, debt and credit history. Once you submit your application, RACV will review and verify the documents. If you meet their eligibility criteria, you will get pre-approval for the amount they are willing to lend to you. With this pre-approval, you can go car shopping with the confidence of knowing what you can afford.

Can I get a car loan with poor credit?

Poor credit doesn’t necessarily mean you won’t be able to get finance for your car purchase, though your options aren’t likely to be the same as someone with good credit.

In fact, a number of specialist lenders exist offering car finance for customers with poor credit, able to provide access to bad credit car loans.

However having a history of poor credit will likely mark you as a potential risk to lenders, so your car financing needs could see higher fees and interest rates. Alternatively, consider a secured car loan, which is a type of loan that uses the car you purchase as collateral, reducing the risk.

Other options include getting someone close to act as a guarantor for your car loan, or to talk to a broker about a personalised rate specific to your circumstances.