There are a range of factors that make up a used car loan - some of which may suit one borrower but not the next. This is why it's crucial that you take the time to compare used car loans carefully to ensure you're choosing the best option for your financial situation and budget. Here are some of the most important factors to compare:
Car loan interest rates determine how much you will pay in interest charges over the life of the loan. Carefully consider your financial situation and long-term goals when deciding between fixed and variable interest rates for a car loan.
If you opt for a fixed interest rate, your interest payments will remain the same throughout your loan term. Fixed rates may provide stability and predictability, which may better suit those who prefer a consistent monthly budget, or those concerned about potential rate hikes.
If you choose a variable rate, it may fluctuate over time in line with the market, or at the lender's discretion, but it's more likely to come with features. As a result, fixed rates may help make budgeting more manageable, but variable rate loans may offer more flexibility.
Some of the extra features that may be available on certain loan products include:
- Extra repayments - You may be able to make extra repayments on top of your regular repayments to pay down your loan faster.
- Redraw facility - This allows you to withdraw any extra repayments you've made if you need to.
- Flexible repayment options - You may be able to choose between making weekly, fortnightly or monthly car loan repayments.
- Balloon payments - More commonly offered when buying a new car, a balloon payment allows you to reduce your regular repayments by making a large lump sum payment at the end of your loan term.
The types of fees you may be charged tend to vary from one lender to the next, but may include:
- upfront fees like application fees
- ongoing fees like annual fees
- early repayment fees
- late payment fees
- early exit fees
Secured vs unsecured loans
A secured loan is guaranteed against the value of an asset which is used as collateral if you default on your loan. Car loans are one of the most common forms of secured personal loans, as the car itself can be used as security. Secured car loans will generally have lower interest rates than unsecured car loans, as they are deemed less of a risk to lenders.
Many car loans are secured loans, with the vehicle used as collateral. Unsecured car loans are also available, but it is likely that their interest rates and fees will be comparatively higher.
The loan term is how long you agree to pay back the loan plus interest. Car loan terms are typically between one to five years. For used cars, the car’s age might affect how long you can have to pay back.
Longer loan terms often mean lower monthly payments, but paying more interest overall. Shorter terms might have higher monthly payments, but you pay less interest during the whole loan. It's worthwhile calculating how much you would pay each month for different loan terms to see how they may suit your budget before you actually apply for the loan.