Three ways to pay off your car loans

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

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.

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 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 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 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.

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 is a balloon payment?

Some lenders will offer borrowers reduced monthly repayments in return for a one-off lump sum – or balloon payment – that the borrower has to pay at the end of the loan. Generally, the total repayments on a loan with a balloon structure will be higher than a loan without.

What is a car loan calculator?

A car loan calculator is an online tool that helps consumers understand how much they would have to repay under different scenarios. Consumers can create these different scenarios by entering different borrowing amounts, interest rates, loan terms and repayment schedules into the car loan calculator.

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 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 trade-in value?

The trade-in value is the price you could realistically charge if you were to sell your car to a dealer while buying a replacement vehicle. Generally, a car’s trade-in value is less than its market value. That’s because the dealer has no interest in buying your car unless it can make a profit – which can only be done if the dealer has room to increase the price.

What is a refinance?

A refinance is when you swap one car loan with another. For example, you might take out a car loan with Lender X because it is the best on the market at the time – but two years later, you might switch to Lender Y because you discover that it now has the best loan. Conditions and fees often apply when you refinance.