Are you looking to upgrade your car, or purchase that vintage classic you’ve had your eye on? If you don’t have enough money saved to purchase your dream second hand vehicle, a used car loan could be a competitive option for you.
Whether you’re in the market for a hatchback, campervan or even a Ford Mustang, a used car loan can help you get behind the wheel, without the hefty price tag.
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What is a used car loan?
Used car loans are personal loans used to finance the purchase of a second-hand vehicle.
How do used car loans work?
Similar to new car loans and personal loans, used car loans involve borrowing a set amount of money, and paying it back with interest over an agreed period of time, known as the loan term.The loan is used to buy a used car, rather than a new car.
What is considered a ‘used’ car?
A used car is technically defined as any car that has been previously registered in Australia. Buying a used car allows you to keep costs down and to avoid the depreciation associated with buying a new car. That’s because you can lose thousands of dollars in market value the moment you drive a car out of the dealership.
What are the different types of used car loans?
Used car loans can be secured or unsecured, and have either fixed or variable interest rates. The sort of car purchase they fund can vary. Some lenders only offer loans on used cars up to a certain age, often up to five years, as they consider older cars too risky to finance. Others may consider offering loans on older cars if they hold their value.
Secured used car loans
A secured car loan is a personal loan that is guaranteed against the value of an asset, usually the car itself. If you can’t pay it off, the lender may seize the asset and sell it to cover their losses. Secured loans are less risky than unsecured loans, so interest rates are typically lower.
Can I get a secured loan using my car as collateral?
Some lenders will not offer secured loans for used cars, or only offer loans for particular vehicle models or those under a certain age. You will need to check with the lender whether you can get a car loan for the second-hand car you’re considering buying. If the car doesn’t qualify as security, you might still be able to secure your car loan with some other asset, such as property, or you could opt for an unsecured car loan instead.
Unsecured used car loans
Unsecured loans do not require collateral. This means if you default on your repayments, the lender can’t repossess your vehicle, or any asset you may have used as collateral on a secured loan. These types of used car loans often have much higher interest rates than secured loans, since they are higher risk to the lender.
Variable vs fixed interest rates
Now you know the difference between secured and unsecured used car loans, it’s time for you to think about whether fixed and variable interest rates will work best for you.
Variable interest rate loans
The interest rate on a variable loan may rise or fall over the term of the loan. These interest rate changes can be influenced by the cash rate set by the Reserve Bank of Australia (RBA) and the lender’s own funding costs. If you decide to take out a variable used car loan, you should budget for higher repayments just in case your lender raises the interest rate during the loan’s term.
Fixed interest rate loans
Fixed rate car loans lock the borrower into the same interest rate and repayments over the life of the loan term. Fixed rate loans can help you avoid any financial stress should interest rates rise. As you’re locked into a set rate, the lender can’t make any unexpected changes to your repayments. However, if your lender reduces their interest rates, you won’t enjoy any savingsavailable with variable interest rate loans.
The interest rate on fixed loans may be higher than rates on variable loans given the certainty they offer. Much like insurance, you need to pay a little extra to protect against the risk of rising interest rates. Another potential negative of fixing is that you may lose flexibility around how you repay your used car loan. Extra fees such as break costs may apply if you try to repay your car loan earlier than agreed or financial penalties may apply if you make extra repayments.
Is it better to buy a used car?
New and used cards have both pros and cons, and the choice of which car is better depends on a variety of factors, including your financial situation and what you want.
New vs used car loans
The main difference between new and used car loans is the financial risk associated with financing the purchase of a second hand vehicle.
When comparing new and used car loans, you need to consider:
Interest rates: In most cases, you are more likely to pay a higher interest rate for a used car loan than you would for a new car loan. This is because most car loan lenders consider used cars a greater financial risk, as they have more wear and tear. Used cars are less likely to last for the lifetime of the loan, which is why lenders charge extra interest to protect themselves from potential loss.
Depreciation: New cars can be impacted significantly by what is known as depreciation. Most new cars reduce in value by around 30 per cent in the first two years after purchase, and can lose thousands of dollars in value as soon as they leave the dealership. With a used car, the previous owner has already absorbed the depreciation, and therefore you can save money on the purchase price and therefore, on the total loan amount.
Loan amount: Used cars often cost less to buy than new cars, so you probably won’t need to borrow as much money than if you buy a new one. A lower loan amount can will mean more affordable repayments and you pay less in interest costs over the lifetime of the loan compared to buying a new car.
Which bank is best for a used car loan?
Australian car loan lenders have different criteria to help them determine whether a car counts as new or used, and to estimate the level of risk involved. For example, some lenders count any car less than two years old as new, while some lenders count all cars over five years old as used.
Comparing used car loans
As with any large purchase, it’s crucial to shop around and compare car loans. The most important thing is to first work out how much you want to borrow and the duration of your loan. Then you can compare used car loans in regards to interest rates and security.
Once you have this information, you can start to estimate your car loan repayments and get anidea of what you can afford. You will pay interest on the amount you borrow, along with various fees and charges, which you will need to investigate.
Creating a car loan budget
When you create your car loan budget, you need to consider:
- Cost of the car
- Car insurance fees
- Registration fees / stamp duty tax
- Repairs and maintenance
- Fuel & road tolls
- Membership to roadside assistance organisations
- Monthly car loan repayments
- The loan term
- Car loan fees & interest
In other words, buyers and borrowers must consider the full costs of owning the car including the financial liabilities, before determining whether they can afford it.
Things to look out for when getting a used car loan
Getting a used car loan can be a complex and timely process, but it’s important to get all the facts before signing anything. If you’re unfamiliar with the loan approval process, there are a few things you need to be aware of:
Extra fees and charges
As well as paying interest on your used car loan, you will most likely also pay fees and charges. These can include application fees, annual fees, early exit fees, ongoing monthly fees and more. It is important to read the Product Disclosure Statement (PDS) and check your lender’scredit guide or any relevant fact sheets before you sign on the dotted line.
It’s also important to check whether your lender charges fees for making extra repayments, to account for the interest they will lose. Commonly found on fixed interest rate loans, these fees can also affect variable interest rate loans, so check the fine print.
The comparison rate
As a helpful guide to total cost, you can also look at a loan’s ‘comparison rate’. From July 2003, the Australian government made it mandatory to display a loan’s comparison rate alongside its advertised interest rate. This bundles the advertised rate along with the main fees and chargesin a single interest rate. This is to give borrowers a more accurate understanding of what theloan will cost – although this rate does not include every cost, nor does it account for added rewards or benefits that may impact your decision.
Some used car loans will also offer what is called a redraw facility. If you are ahead in your repayment schedule, and find yourself in financial difficulty, you can “redraw” any extrarepayments. As with all financial products, it is worth asking if the lender has any restrictions on how exactly this redraw facility is used.
In Australia, if you are buying a used car, it’s important to check the history of the car, in case it has been written off or damaged previously. The Personal Property Security Register (PPSR), formerly known as REVS, helps to protect consumers buying used cars. A PPSR search is a basic check for financial interests, written-off records and stolen vehicles, so you can be aware of the history of the car before you buy it.
Used car insurance
Loan protection insurance is often sold as an add-on in car dealerships, to help you make repayments if you experience financial difficulties. If you feel you will struggle to make your repayments, it may be wiser to save a larger deposit, and borrow a smaller loan amount than pay for insurance. However, if you would like the reassurance of loan protection insurance, shop around. Dealership insurances can have high fees, so comparing used car loan insurance could save you money in the long term.
Your credit history is a record of the dealings you’ve had with credit providers such as banks, credit card companies, mobile phone companies and internet companies. Your credit history records how successfully you’ve managed your repayments. It also records how many credit applications you’ve made and how many of those were rejected.
Credit providers refer to your credit history when deciding whether or not to extend you credit. Missing repayments is a bad sign; making too many applications or having applications rejected can also be a bad sign.
Credit infringements can remain on your credit history for five years – or seven years for serious infringements.
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.
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.
There’s no set number. That’s because borrowing capacity differs from person to person, as well as lender to lender.
Lenders don’t give out car loans unless they’re confident they’ll be repaid. Each person is different, so the amount of money one person can successfully borrow will differ from another person’s number. Also, each lender uses its own formulas to calculate borrowing capacity – so Mr & Mrs Smith might find that while Lender X will give them a car loan for $20,000, Lender Y will offer only $18,000.
A car loan, also known as vehicle finance, is money that a consumer borrows with the express purpose of buying a vehicle, such as a car, motorbike, van, truck or campervan. Car loans can be used for both new and used vehicles.
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.
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.
Property Personal Finance Writer
A property and personal finance writer, Nick Bendel covers property, loans, credit cards, superannuation, and other bank products. Nick has previously written for The Adviser, Mortgage Business, Lifehacker, Business Insider, Yahoo Finance, and InvestorDaily, and loves getting elbow-deep in the latest ABS, APRA and RBA data.
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