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Not every borrower approaches a car loan as a means to an end, or just another pesky monthly expense. There are features that some car loan issuers in Australia may offer that could help borrowers to get on top of their debt early and access cash when needed.
Car loans with a redraw facility are a popular option for borrowers who want to do just that. Let’s explore what this feature is, the benefits and drawbacks and whether it may suit your personal financial situation and goals.
What is a car loan redraw facility?
A car loan redraw facility allows borrowers to “redraw” or access any additional funds they have paid into their car loan outside of the regular ongoing repayments. Just like a home loan redraw facility, it is similar to a bank account in that you may deposit funds and may be able to access them at a later date, depending on the lending criteria and eligibility requirements.
The ability to dip into funds deposited into the redraw facility when needed makes it a competitive feature to consider prioritising in your car loan comparison. For example, if you need to pay for mechanical repairs on the vehicle, or even if your energy bill was higher than expected, a redraw facility may offer financial relief.
Not every car loan lender will allow this feature, and often may penalise customers who try to make extra repayments. Some car loan lenders may also charge a fee for using the redraw facility, and it may also come with a minimum redraw cap. It’s worth reading the Product Disclosure Statement (PDS) and terms and conditions of the loan contract before applying.
What are the benefits and risks of a car loan redraw facility?
It’s worth exploring the advantages and disadvantages of a redraw facility before proceeding.
There are a few key benefits to having a redraw facility attached to your car loan, including:
- Access to funds – as mentioned earlier, being able to dip into the extra/early repayments you’ve made on your car loan may be beneficial, depending on your financial situation.
- Lower your loan repayments – Having a redraw facility means you can make extra repayments, and these flexible repayments are a competitive feature for some car loan borrowers. Making more than the minimum repayments on a car loan will help to reduce the principal owing on the loan. By doing so, you may lower your ongoing car loan repayments, as well as the overall interest charged over the life of the loan.
- Save more than a savings account – Interest rates on saving accounts are at record lows. This means that the interest you save on your car loan by putting extra funds into your redraw may be more than what you otherwise could have earned in your savings account.
On the flip side, there are some risks involved with adding a redraw facility to your car loan, including:
- Reducing your repayment discount - Keep in mind that by withdrawing any of the funds you deposit into your redraw facility, you may reduce the discount you’ve given yourself on your loan monthly repayments.
- Higher rates – Sometimes a car loan lender may charge you more in interest for accessing features on a car loan. Keep an eye out for the interest rate being charged for the privilege of a redraw facility.
- Fees and caps – Loan providers may also charge borrowers a fee for accessing the redraw facility and the redraw facility may also come with a minimum redraw limit. If you don’t want to be hindered in terms of how much you can access from your redraw, you may want to compare fee-free and cap-free options.
What to look for in a car loan with a redraw facility?
There is more to a car loan than the flexibility the lender can offer you. It’s crucial that the car loan and provider suit your financial needs and goals, and that you compare a range of loan features, rates, and fees before you consider applying. All of which may impact the overall cost of your car loan with a redraw facility.
Features to compare in a car loan:
- Interest rates – The interest rate charged on your car loan is arguably the biggest influence on the overall cost of the loan. Adding a redraw facility may mean the lender will charge you a higher rate for the privilege, so it’s worth looking at the comparison rate of the loan as well. The comparison rate factors in the upfront fees and ongoing charges, so comparing different comparison rates may help you to find the most competitive loan for your needs.
- Fees and charges – Speaking of upfront fees and ongoing charges, there are a range of ways a car loan lender may charge you outside of your regular ongoing repayments. This includes establishment fees, monthly fees, extra repayment fees and more.
- Loan term – A car loan is generally between 1-5 years but may be longer depending on the lender. The length of the car loan may influence the overall cost, with shorter loan terms meaning higher repayments but less interest charged overall, and vice versa.
- Interest rate type – Generally, car loan providers offer features like a redraw facility to more variable rate car loans. Car loans with variable rates are subject to market fluctuation, meaning your interest rate could hike or drop during your loan term. A fixed rate car loan may offer more stability in your budgeting than a variable interest rate, but the lender may not offer as many features, like a redraw facility.
- Secured or unsecured loan – Car loans are either secured loans, in which the vehicle is used as collateral to secure on the loan, or unsecured loans, in which the vehicle isn’t secured to the loan and cannot be repossessed by the lender in the event of default. Secured car loans may come with lower interest rates due to the reduced risk on the lender from the vehicle being used as security.
- New or used car – A redraw facility may be available on both new car loans and used car loans, depending on the lender. However, the type of car you are seeking finance for may also influence the cost of the loan. New cars are generally more expensive than used cars, which means you may pay more interest over the life of the loan as the principal is higher. However, used car loans tend to come with higher interest rates on average, making new cars a potential low-rate car loan option.
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Personal Finance Editor
Alex is a personal finance writer and editor at RateCity, and has been writing about finance for over five years. She is passionate about closing the gender pay and superannuation gap, and aims to help young Aussies to overcome their financial apathy and better manage their finances. Alex has been published in numerous print and online outlets, including Money Magazine, Lifehacker Australia, and Business Insider.
Frequently asked questions
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 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 collateral?
Collateral, or security, is an asset you agree to surrender to a lender if you fail to repay a loan. Generally, the collateral for a car loan is the car itself. So 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 redraw facility?
A redraw facility allows you to re-borrow any funds you may have repaid ahead of schedule – although conditions and fees often apply. Not all car loans come with a redraw facility.
What is equity?
The equity is the share of the car that you own. For example, if you take out a $15,000 loan to buy a $20,000 car, you have $5,000 of equity in the vehicle, or 25 per cent. (The lender has the other 75 per cent.) Equity changes over time as you pay off your loan and your car depreciates in value. For example, two years later you might now owe $10,000 on your car, which might now be worth $15,000. In that case, you would still have $5,000 of equity in the vehicle, but your share would be 33 per cent.
What is salary packaging?
Salary packaging is an arrangement you can make with your employer that can allow you to buy a car from your pre-tax salary. The advantage of salary packaging is that it will redue your taxable income.
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.
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 repayment frequency?
Repayment frequency is how regularly you have to make car loan repayments to your lender. The most common repayment frequency is monthly, but many lenders will also give you the option of making fortnightly or weekly repayments.
What are repayments?
Repayments are the regular payments you make to pay off your car 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 an LVR?
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 take out a $15,000 loan to buy a $20,000 car, you have an LVR of 75 per cent. LVRs change over time as you pay off your loan and your car depreciates in value. For example, two years later you might now owe $10,000 on your car, which might now be worth $15,000. In that case, although there would still be a $5,000 difference between the size of the outstanding loan and the value of the car, the LVR would now be 67 per cent.
What is the principal?
The principal 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.
Can you put a deposit on a car to hold it?
It’s up to individual car dealers to decide whether to promise to hold on to cars in exchange for deposits.
Some car dealers will request a deposit and promise, in return, to hold on to the car for a certain period of time. Others will request a deposit but make no guarantees, other than to return the deposit if they end up selling the car to someone else.
Some car dealers ask for deposits; others don’t. If you get asked for a deposit and you decide to pay it, make sure the dealer gives you signed paperwork before you make the payment and a receipt after you’ve made the payment.
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.
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 guarantor on a car loan?
A guarantor on a car loan is a third party, usually a relative or friend, who guarantees to meet the repayments of a loan for the purchase of a car, if the borrower/owner of the car defaults on the loan.
Guarantor car loans can be useful for people who would otherwise struggle in being accepted for credit to purchase a vehicle. These may include people with bad credit, students and young people who may have no credit history, as well as some pensioners.
Many lenders offer guarantor car loans, guarantor personal loans and guarantor home loans, because of the significantly reduced risk to the lender.
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.
How do you get a car loan?
There are four different ways you can get a car loan. You can go straight to a lender. You can get a finance broker to organise a car loan for you. You can get ‘dealer finance’ – which is when the car dealer organises a car loan for you. Or you can organise your own car loan through a comparison website, like RateCity.
Whichever method you choose, you will need to provide proof of identification, proof of income and proof of savings. So you may be asked for any combination of passport, driver’s licence, bank statements, payslips, tax returns and utility bills. You might also be asked to provide proof of insurance.