Three ways to pay off your car loan

Three ways to pay off your car loan

Australians have always had a love affair with the car, despite a growing trend towards public transport options, especially for environmental reasons.  But nothing quite stacks up to the convenience of a car – particularly when you have kids and vast amounts of shopping and dropping off to do.

According to the ABS, there were 19.5 million registered motor vehicles as at 31 January 2019 and the national fleet increased by 1.7 per cent from 2018 to 2019. 

Graph Image for Percentage Change from 2018 to 2019 - By State

Data Accurate as of 29th July 2019.

Source: Percentage Change from 2018 to 2019 – By State-Graph_data 2019

So, for those of you who’ll be getting some new wheels, how are you planning on financing it?

1. Borrow the traditional way

Many Aussies will take out a car loan in order to purchase a new vehicle, whether they’re looking at a compact hatchback or larger family vehicle. 

Just as with a home loan, it’s important to complete a comparison of various products on the market. Interest rates for personal loans vary, and like home loans, there are both variable- and fixed-rate options. If the Reserve Bank of Australia board changes the official cash rate (OCR) this can affect the interest rates for variable-rate loans.

Anyone wanting certainty about their car loan repayment amounts may wish to take out a fixed-rate personal loan.

Secondly, there are both secured and unsecured loans available. A lender who registers a security interest over an asset has recourse if the borrower doesn’t pay the loan back. Accordingly, these “secured” loans are less risky for the lender, so interest rates may be more favourable.

2. Add it to the home loan and escalate repayments

Using a home loan’s redraw facility is an alternative to taking out a personal loan — and interest rates are generally lower.

RateCity research shows that a five-year, $30,000 secured car loan on a rate of 8 per cent would lead to $6,497 in interest repayments.

By contrast, a property owner who uses their home loan redraw facility on a home loan rate of 5.37 percent will pay just $5,699 in interest over the same period.

3. Redraw and pay it off over time

There’s a third option, but it’s potentially a trap.

“Using the redraw facility on a home loan offers a lower interest rate than most personal loan/car loan options, but you must have the discipline to make higher repayments in order to clear the debt as soon as possible to avoid a hefty interest bill,” RateCity said.

An homeowner who takes 25 years to pay off $40,000 from their redraw facility at the average home loan rate of 5.37 percent will pay a whopping $24,573 in interest.

You can find out everything else you need to know about getting a car loan in Australia in the RateCity Car Loan Guide.

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Learn more about car loans

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.

What are loan repayments?

Loan repayments are the regular payments you make to pay off your car loan. Loan repayments generally occur on a monthly basis, although many lenders will also give you the option of making fortnightly or weekly loan repayments.

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.

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 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 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.

What is a guarantor car loan?

A guarantor car loan is a type of loan that features a guarantor on the agreement. The guarantor is a third-party individual, often a friend or relative, who guarantees the loan will be repaid if the borrower defaults on the car loan.

Guarantor car loans are often geared at people who might otherwise struggle being accepted for a secured car loan when purchasing a vehicle. Some of the reasons might include a lack of credit history such as with a student or young person, if there’s bad credit, or age as a factor such as with pensioners.

What are the pros and cons of guarantor car loans?

Like all things, there are positives and negatives to guarantor car loans, though one may outweigh the other depending on your needs.

Guarantor car loan pros may include that you’re more likely to be approved for a long if you have no credit or a history with bad credit, that you’re more likely to secure a car loan with a lower interest rate, and that because your guarantor car loan is based on a relationship, you will be more inclined to meet your repayment schedule.

However, there are negatives, as well. Guarantor car loan cons may include leaving a detrimental mark on a personal relationship with added strain if you don’t meet your repayments, and you may take out a loan that you can’t actually afford.

Weighing these pros and cons will give you a greater understanding of whether a guarantor loan is ideal for your circumstances.

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.

What is compulsory third-party insurance?

Compulsory third-party insurance, also known as CTP 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 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 doesn’t cover you for vehicle damage or theft.

What is vehicle finance?

Vehicle finance, also known as a car loan, is money that a consumer borrows with the express purpose of buying a vehicle, such as a car, motorbike, van, truck or campervan. Vehicle finance can be used for both new and used vehicles.

What is an operating lease?

An operating lease is an arrangement by which a company leases a car from a vehicle fleet supplier for a set period. It’s a bit like a long-term car rental in that the company gains access to the car but the supplier retains ownership. Companies like operating leases because they are tax-deductible and because they save the company from having to make a large upfront payment to buy a car.

What is an upfront fee?

An upfront fee is a one-off fee that many lenders charge when you take out a car loan.