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Looking to get back on the road, but not sure a fixed rate car loan is the right choice?

Comparing fixed rate car loans can be tricky, as lenders have different terms, fees and charges to consider.

If you're in the market for a new car and you're looking for car finance options, get all the facts before you act and use the RateCity website to compare loan features and fees.

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 or used car or other eligible new or used vehicle. 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 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.

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  
= $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. The lender sees 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.

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 lower 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 potentially make a low 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 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.

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. Loans that include the option to make extra repayments may also offer a redraw facility, so you can access any additional money you have paid on the loan if need be. 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.  

Types of fees and charges that may be applicable include:

  • Application fees
  • Establishment fees
  • Extra repayment fees
  • Redraw fees
  • Early payout/Early repayment fees
  • Other ongoing or account keeping fees

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. 

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 year to 7 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 regular fortnightly or monthly repayments will typically be more affordable on a longer loan term. 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 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.

How long can a fixed rate last?

Different to a fixed rate home loan, when you take out a fixed rate car loan the interest rate is fixed for the entire length of the loan term. A car loan term will in most cases be a much shorter loan term than a mortgage - which is commonly on a 25 to 30 year term - 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.

This can be beneficial, as interest rate rises won't be passed onto you at any point during your loan term, though neither will interest rate cuts.

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 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.

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 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 loan term?

The loan term is the amount of time the lender gives you to repay the car loan. For example, if you take out a $20,000 car loan with a five-year loan term, you would be expected to pay off the entire $20,000 (plus interest) within five years.

How to get pre-approval for your ANZ car loan?

Getting pre-approval on your car loan can give you a good idea of how much you may be allowed to borrow. This will help you set your limits while selecting your car. You can apply for pre-approval for an ANZ car loan by filling out a simple online application form, where you’ll have to submit relevant identity, employment and income documentation. 

ANZ will then conduct a credit check based on your application and documentation. It’s important to note that this could have an impact on your credit history. Based on your credit and income documentation analysis, ANZ will provide an amount they are willing to give you as a loan. After this, you can find the right car that matches the proposed loan amount and send it through your final loan application. 

It’s important to remember that pre-approval gives you an indication of how much you can borrow from ANZ to purchase your car, but it doesn’t guarantee the final approval. 

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 do I need to apply for a chattel mortgage?

Chattel mortgages are a form of secured car loan for businesses. The lender will set up a mortgage, while you take the car’s ownership. When the mortgage is paid off, you own the car. The borrowed amount is repaid through regular installments over a fixed period of time.

To qualify, you’ll have to meet the following chattel mortgage requirements:

  • The car should be used for business purposes at least 51 per cent of the time.
  • You must hold a valid Australian Business Number (ABN).
  • You must show you can service the loan on time
  • Identity proof
  • Financial records, such as profit and loss account and balance sheet
  • Details of the vehicle you want to buy
  • Bank statement for your business

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.

What is a chattel mortgage fee?

A chattel mortgage fee is an amount you’ll pay the lender to procure the funds for a chattel mortgage.

You can use a chattel mortgage to finance vehicles used for your business at least 50 per cent of the time. It’s similar to a secured vehicle loan. The lender will give you the funds required to purchase the vehicle whilst you retain the ownership. The finance company then holds a mortgage on the vehicle, using the car as the security, until you repay the loan amount. At the end of the loan term or once you’ve paid it off, the lender will release the mortgage. Alternatively, you can opt to trade-in or refinance the residual value.

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 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.

How to get pre-approved for a credit union car loan?

Getting pre-approval for a credit union car loan can make the process and paperwork required to buy a car more streamlined and less stressful. You can apply for pre-approval for a credit union car loan, online or contact your credit union. You’ll be asked to provide relevant documentation regarding your income. After you submit your application, your credit union will review and evaluate it along with the documents you submitted. If you meet the eligibility criteria, your loan will be pre-approved for a specific amount.

With pre-approval for a credit union car loan in hand, you can negotiate your new car’s price with peace of mind you have the funds.

What is dealer finance?

Dealer finance is a car loan organised through a car dealer – as opposed to car loans organised by a finance broker or directly by the lender.

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 a chattel mortgage used for?

A chattel mortgage is usually used to buy an asset - such as a car - for your company for business use. Relatively similar to regular mortgages, a chattel mortgage structure is based on a lender providing you with funds to purchase an asset while registering their security interest on the Personal Property Securities Register (PPSR) for the life of the loan. In this case, the asset is known as the chattel. After the loan has been repaid, you will have full ownership of the asset. 

A popular finance option, a chattel mortgage is usually preferred by self-employed or small business owners, due to flexible options available for repayment. In some cases, you may get 100 per cent of the cost of the asset, which means that no upfront deposit needs to be put down.

However, it’s important to note that a chattel mortgage is not regulated under the National Consumer Credit Protection Act. It’s therefore important to seek advice about the product and fully understand the agreement terms before signing.