RateCity's Car Loans Guide
Is the open road calling your name? Or has a new addition to your family got you looking at family cars instead of two-seater sports models?
Whatever your car type, whether it’s new or used, big or small, a car loan is the first step in helping you to secure your dream drive.
You may have painted car loans with the same brush as used car salesmen, but rest assured, our Car Loans Guide will assist you with any questions and arm you with the knowledge to track down the best deal for you. Find out the difference between the types of loans available and how to prepare yourself when applying.
Are you looking for a new car or a used car? The type of car you choose and the age of the car may help determine what type of car loan you may require.
New car loan
Have your eye on a sparkling new car? You’d better start looking at new car loans – a type of personal loan available to fund the purchase of your new car.
With this type of loan, there are usually conditions about the age of the car that you wish to purchase. These will differ between financial institutions. Some may offer new car loans to purchase brand new cars only, while some may consider financing a car no more than two years old or with a certain number of kilometres on the clock.
The great news for new car buyers is lower interest rates. The interest rates for new car loans are often a bit lower than for used car loans, as new cars generally have higher resale value than older models, reducing the lender’s financial risk, especially for secured car loans.
Used car loan
Decided to purchase a pre-loved vehicle? A used car loan will allow you to borrow money to purchase a used car only.
Depending on the financial institution, there may be eligibility restrictions on the age of the car. For example, some may offer this type of loan for cars that are between two and five years old. Always check the terms and conditions with your lender.
The other major difference between a used car loan and a new car loan is that interest rates may be a little higher for used car loans. But like a new car loan, there are also a range of secured and unsecured used car loans available to choose from.
The dreaded paperwork. It’s a tedious part of life but a necessary process we can’t avoid. We’ve tried to make it easier for you by putting together a checklist of some of the documentation that you may need to support your car loan application.
It’s time to prove yourself. Usually when applying for a loan you need to provide identification in accordance with the ID check system.
Have your driver’s license or passport ready as well as your birth certificate and Medicare card, or two additional cards with your name and photo on them, to prove you are who you say you are.
It sounds silly that you wouldn’t know your own number, but you don’t call yourself, do you? Make sure you have all of your contact details on you, such as address and phone numbers, so that you don’t slow down the application process.
Copies of bank statements
It sounds silly that you wouldn’t know your own number, but you don’t call yourself, do you? Make sure you have all your contact details on you, such as your address and phone numbers, so that you don’t slow down the application process.
Credit history records
Be prepared for your credit history to be studied. While it can feel a little intrusive, a credit check is a comprehensive way for lenders to determine if you are going to be able to make the loan repayments.
If you have any credit cards or other loans, they may ask to see copies of the past few statements for evidence that you can meet the repayments and have not defaulted.
If you’ve never held a loan or a credit card before, don’t worry: proof of income and any bills such as phone or electricity and even rental payment receipts can all count towards your credit history.
Proof of income
Unfortunately, your word doesn’t carry the same weight it would have in the old days. To prove you earn the amount that you state on your application, you will need to provide pay slips from the past few months. If you don’t have copies of these, you may be able to use your most recent tax return or group certificates. However, check with your lender to see if they will accept these.
If you are using the car to secure against the loan, you will need to provide details of the car, such as registration and engine number. If you buy it from a dealer, you may need to provide their details, as your lender may need to make a cheque directly to the dealer. You may also need a copy of the receipt when you purchase it to prove the cost.
We aren’t limited for choice when it comes to cars, and the same applies for car loans. Unfortunately, this means there is no one-size-fits-all car loan, so you will have to study your options to find the right loan type for you.
Get familiar with the different car loan types so you can spot the right one:
A variable car loan’s interest rates are dependent on the lender, which means they can fluctuate and affect your repayment amount. This type of loan can be harder to budget for as your repayments may vary from month to month.
If your financial institution increases the interest rate, your repayments will increase, costing you more. But if they decrease, so will your repayments, potentially saving you some money.
As you might have guessed, a fixed car loan is a type of loan where the interest rate is fixed for the term of the loan, which means your repayments will always stay the same.
Because of this, it is easier to budget for a fixed loan compared to a variable loan; however, you won’t get to enjoy discounted repayments if your lender was to reduce its variable rates.
With a secured car loan, generally the car you wish to purchase is used as an asset for security against the loan. This loan is considered a lower risk for lenders, because if you default on your repayments they can repossess your vehicle and sell it to pay off your loan. So it generally offers better interest rates than an unsecured loan.
Unsecured car loans do not require your car to be used as security against the loan. Instead, you need to prove that you can meet the repayments by showing a history of savings, or if you have previously had a loan or a credit card, that you met the repayments. While unsecured car loans tend to have higher interest rates than secured car loans, they often offer greater flexibility.
If you think the interest rate is the only cost of taking out a car loan, think again. Lenders might also hit you with one or more fees and charges:
An establishment fee is a one-off upfront fee designed to cover the cost of setting up your car loan.
Early termination fee
You might have to pay a penalty, or an early termination fee, if you pay off your loan ahead of schedule. This would be to compensate the lender for lost interest payments.
Some lenders might offer to reduce your monthly repayments if you agree to pay a one-off lump sum – or balloon payment – at the end of the loan. The total repayments on a loan with a balloon structure is usually higher than a loan without.
It’s the fine print that really requires your attention. When narrowing down your car loan options, make sure you consider the loan features. There are a range of features attached to car loans, which are all specific to the type of loan and the lender.
Some of the popular features are:
Can you make extra payments on your car loan? Doing so can allow you to pay off the loan sooner and save money to boot. To find out about this feature, ask your prospective lender:
- If your car loan allows extra repayments;
- If you will be charged for doing so, and;
- If there is a limit on how many repayments you can make within a certain time frame.
No early exit penalty
If you come into extra money and want to pay off your car loan before the end of the contracted term, some lenders may charge a penalty fee. However, if you choose a car loan with no early exit charges, you may be able to save money on interest charges by quickly clearing your car loan.
Unfortunately, the car loan and car purchase aren’t the only costs you’ll likely face.
Here are four other car expenses that may have you reaching for your wallet:
Compulsory third-party insurance
Compulsory third-party insurance, or CTP insurance, is required. If you’re responsible for a car accident, your compulsory third-party insurance will be used to pay any compensation due to anyone who might be injured or killed. However, compulsory third-party insurance won’t cover you for vehicle damage or theft.
Comprehensive insurance protects you if you’re responsible for a car accident. Policies vary from provider to provider, but comprehensive insurance generally covers you for damage to your car and property, as well as the other parties’ cars and property. A comprehensive insurance policy may also protect you from theft, vandalism and natural disasters.
Stamp duty, or motor vehicle duty, is a tax you pay when you transfer a car into your name. Stamp duty applies to both new and used cars. Stamp duty is a state tax, so rates and conditions vary from state to state:
- New South Wales
- Western Australia
- South Australia
- Northern Territory
A pink slip is another name for the safety check that needs to be done before a car owner can renew the vehicle’s registration.
Start comparing a great range of low-interest car loans now.
Set a budget and stick to it. We know that’s easier said than done when you show up to a car yard looking for a Kia Rio and find yourself sitting in an Audi. However, when applying for a car loan it is important to know your budget, so you don’t sell yourself short by under-borrowing, or put extra financial pressure on yourself by over-borrowing.
The amount you should borrow will depend on the price of the car that you wish to purchase, and how much of your own money you will put towards the car. Most importantly, it will depend on what you can afford to make in repayments. Put those Audi keys down…
Work out a monthly budget to see how much money you could afford to put towards paying off your car loan. We can give you a hand with these calculations. Use our car loan repayment calculator to estimate what your loan repayments will be.
Also, keep in mind that some lenders also have a minimum and maximum amount that you can borrow, so be sure to keep within their limitations.
One of the difficult parts of finding a car loan is trying to make sense of all the confusing finance talk.
To make your life easier, we’ve compiled a list of terms you might encounter:
The loan term is the amount of time the lender gives you to repay the car loan. For example, a loan with a five-year loan term would have to be paid off within five years.
This is the headline interest rate. It doesn’t include fees and charges, so it might understate how much money you would ultimately have to repay over the life of the loan.
This is the ‘real’ interest rate, because it combines the advertised rate with any standard fees and charges. The comparison rate is calculated based on a loan of $30,000 over five years, so it might beless accurate if you borrow a different amount or have a different loan term.
This is the amount of money you can borrow from a particular lender. Yourborrowing capacitymight vary from lender to lender, because each institution uses its own in-house formula. Also, yourborrowing capacity might differ from that of your friends and family, because each borrower’s circumstances are unique.
The LVR, or loan-to-value ratio, is a percentage that expresses the amount of money owed on the car compared to the value of the car. For example, if you took out a $15,000 loan to buy a $20,000 car, you would an LVR of 75 per cent.
A pre-approval is a formal document stating how much credit a lender will give you once you’ve found the car you want to buy. Please note that a pre-approval is not a contract, so the lender is under no obligation to follow through.
This is the value of the loan that is still outstanding. If a borrower takes out a $20,000 loan, the principal is $20,000. If the borrower repays $5,000 in the first year, the principal is now $15,000.
A redraw facility allows you to access any funds you may have repaid ahead of schedule, in case you need money in a hurry – although conditions and fees often apply. Not all car loans come with a redraw facility.
A finance broker is a middleman who can help you organise a car loan with a range of lenders. Brokers generally don’t charge for their services; instead, they receive commission payments from lenders.
This is an arrangement you can make with your employer to buy a car from your pre-tax salary. The advantage of salary packaging is that it can reduce your taxable income, which can have tax benefits in some circumstances – consult a tax accountant for more information.