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What to consider before taking a car loan

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What to consider before taking a car loan

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 car type, new or used, big or small, a car loan is the first step in helping you to secure your dream drive.

You may have tainted 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.

Loan Amount

Set a budget and stick to it. We know it’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 loan price so that you don’t sell yourself short by under-borrowing or adding 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 use towards the car. Most importantly, it will depend on what you can afford to make in repayments. Put those Audi keys down…


Repayments

Work out a monthly budget to see the amount of money you will be able to afford to put towards paying off your car loan. We can give you a hand with these calculations. Use ourcar loan repayment calculatorwhich will show you approximately 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.

We aren’t limited for choice when it comes to choosing a car 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:


Variable

A variable car loan’s interest rates are dependent on the lender, which means they can fluctuate and affect your repayment amount. So if your financial institution increases the interest rate, your repayments will increase; and if they decrease, so will your repayments. This type of loan is harder to budget for as your repayments may vary from month to month, however the interest rates are generally lower than fixed rates.

Fixed

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, fixed rates tend to be higher than variable rates.

Secured

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

Unsecured car loansdo not require the car 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. Some borrowers may not have the option of choosing between secured andunsecured car loans, but withso many to choose from on RateCity, you are likely to find one that is great value and suits your requirements.

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 several fees and charges:


Establishment fee

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 early termination fee, if you pay off your loan ahead of schedule. This would be to compensate the lender for lost interest payments.

Balloon payment

Some lenders might offer to reduce yourmonthly repaymentsif 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.

Are you looking for a new car or a used car? The type of car you choose and the age of the car will determine what type of car loan you may require.


New car loan

So you have your eye on a sparkling new car? You better start looking atnew car loansthen. A new car loan is 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 offernew car loansto brand new cars only, while some may consider a new 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 fornew car loansare usually a bit lower than a used car loan as this type of loan is seen as less risky to the lender because new cars generally have higher resale value than older models.

Used car loan

You’ve decided to purchase a pre-loved vehicle? A used car loan will allow you to borrow money in order to purchase a used car only. Depending on the financial institution, there may be restrictions on the age of the car in order to be eligible. For example, some may offer this type of loan to cars that are between two to five years old. Always check with your lender for terms and conditions.

The other major difference between a used car loan and a new car loan is that interest rates may be a little higher forused car loans. But like a new car loan, there are also a range of secured and unsecuredused car loansavailable to choose from.

It’s the fine print that really requires your attention. When narrowing down your car loan options, make sure you look into 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 preferred features are:


No early exit penalty

If you come into extra money and want to pay off your loan early, before the end of the term, you want to know that you can do so without being penalised. This will differ between lenders and the loan type you apply for so make sure you enquire about this feature.

Extra repayments

Can you make extra payments off your car loan? Doing so will 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. These are the finer details you should find out before applying for a loan.

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.


Identification

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.

Contact details

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

Most lenders will ask for copies of your bank statements from the past few months to see that you have a savings history. If you no longer receive paper statements, you can still log into your internet banking and print them out or even email them to your lender.

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. In order 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.

Car details

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 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.

One of the difficult things about finding a car loan is trying to make sense of all the confusing finance talk.

So to make your life easier, we’ve compiled a list of terms you might encounter.


Loan term

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 have to repay over the life of the loan.

Comparison rate

This is the ‘real’ interest rate, because it combines the advertised rate with any fees and charges. The comparison rate is calculated based on a loan of $30,000 over five years, so it might be a little inaccurate if you borrow a different amount or have a different loan term.

Borrowing capacity

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 formulas. Also, yourborrowing capacitymight might differ from that of your friends and family, because each consumer’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.

Pre-approval

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.

Principal

This is the value of the loan that is still outstanding. So 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.

Redraw facility

A redraw facility allows you to access any funds you may have repaid ahead of schedule – although conditions and fees often apply. Not all car loans come with a redraw facility.

Finance broker

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.

Salary packaging

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 will reduce your taxable income.

Unfortunately, the car loan and car purchase aren’t the only costs you’ll face.

Here are four other things that will have you reaching for your wallet:


Compulsory third-party insurance

Compulsory third-party insurance, or CTP insurance, is compulsory. 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

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

Stamp duty, or motor vehicle duty, is a tax you pay when you transfer a car into your name.Stamp dutyapplies to both new and used cars.Stamp dutyis a state tax, so rates and conditions vary from state to state:New South Wales,Victoria,Queensland,Western Australia,South Australia,Tasmania,ACTandNorthern Territory.

Pink slip

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.

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