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Variable Rate Car Loans
One of the biggest benefits of owning a car is the flexibility it adds to your everyday life. Want to pop down to the shops? Just a drive away. Need to move something from A to B? Put it in the car. Late for an urgent appointment? You COULD look at public transport schedules and lace up your walking shoes… or you could just jump behind the wheel instead.
If flexibility is important to you, then a car loan with a variable interest rate may also prove appealing. Depending on your lender and financial situation, a variable rate car loan may allow you to save some money on your monthly repayments, or even to pay off your car loan early and hit the road in your very own car that much sooner.
The basics of car loan interest rates
When you borrow money to buy a new or used car, you’ll have to pay your lender a certain amount of interest in addition to the value of the car.
Many lenders offer car loans with fixed interest rates, where the amount of interest that’s charged with your repayments remains the same from month to month. This keeps your repayments consistent for the full term of your loan, helping to ensure that your budget remains simple.
However, some lenders offer car loans with variable interest rates, where your monthly repayments may rise or fall when the lender raises or lowers its interest rates to suit the prevailing economic conditions.
Whether you’re looking at variable or fixed interest rates for your car loan, you’ll also have to pay any fees the lender charges. A low-interest car loan with high fees and charges could ultimately cost you more in total than a higher-interest car loan with lower fees and charges.
To make comparing the total cost of different car loans a bit simpler, take a look at their Comparison Rates. These figures combine each loan’s advertised interest rate with its standard fees and charges, giving you a more accurate guideline for seeing how different car loans stack up alongside one another.
It’s usually worth taking a closer look at the available car loan options – some lenders may offer additional features that could add extra value and influence your decision. Just remember that some car loans have nonstandard fees, charges and other costs that aren’t included in their comparison rates.
Variable Rate Car Loan Benefits
One of the biggest potential benefits of choosing a variable rate car loan is that you may find yourself paying less interest than you expected. While you may start paying off your car loan at the advertised rate, if your lender cuts its interest rates, your monthly repayments will drop accordingly.
The other major benefit of variable rate car loans is that they often offer greater flexibility around your repayments than similar fixed rate car loans, which are more likely to lock you into a pre-set repayment plan, with penalty fees for making extra repayments or for exiting the loan early.
With a variable rate car loan, if interest rates are cut, you may choose to put the money you save on repayments to good use somewhere else, though one possible option is to add these extra savings onto your car loan and get ahead of your repayment schedule. This can help to bring you closer to fully paying off your car loan ahead of schedule, reducing your total number of repayments, and reducing the total interest you’ll pay over your loan’s lifetime.
Variable Rate Car Loan drawbacks
Because there’s no such thing as a crystal ball that makes foolproof economic forecasts, when you take out a variable rate car loan, you run the risk that interest rates may rise during its term. The longer the term of your car loan, the greater the likelihood of eventually experiencing a rate rise. An extended period of rising rates could leave you paying significantly more for your car loan than what you initially budgeted for, putting you at greater risk of financial stress.
Also, it’s worth checking the terms and conditions of your variable rate car loan before you start thinking about exiting the loan early. While many variable rate car loans offer more flexible repayment terms than their fixed rate counterparts, some lenders charge fees for making an early exit from their loans. Make sure that paying off your car loan early won’t accidentally cost you more than you expected.
When you’re comparing your variable rate car loan options, a Redraw Facility is one feature that’s often worth keeping your eye out for. A redraw facility allows you to withdraw any extra money you pay onto your car loan in excess of the repayment schedule, subject to your lender’s terms and conditions. This can help you to confidently make extra repayments and get ahead on your car loan, since if an emergency comes up and your finances get a bit tight, you’ll have the option to unlock your extra car loan repayments and put them back into your pocket again.
Secured and Unsecured Car Loans
One way to help keep your car loan’s variable interest rates on the low side is to opt for a Secured Car Loan. By using the value of the car you’re buying as collateral to guarantee your loan, you can lessen your lender’s financial risk – if you default on your car loan repayments, the lender will be able to repossess and sell your car to make their money back. This added security for the lender means they’re more likely to offer you lower interest rates.
However, to qualify for a secured car loan with certain lenders, you may need to be buying a car of a particular make and model, or one that’s under a certain age, to better guarantee its value. And of course, there’s the risk that if you don’t make your repayments, you could end up losing the car.
If this doesn’t appeal to you, there is the option of an Unsecured Car Loan, which doesn’t require the same kind of security, and thus has fewer restrictions around what vehicles it can be used to buy. However, these loans tend to have higher average interest rates to better make up for the increased financial risk to their lenders.
100% car loans
While many variable rate car loans offer increased flexibility compared to some fixed rate car loans, you’re likely to still need to pay a deposit if you want to enjoy the lowest possible interest rates, as a deposit helps to financially secure your loan and reduce the lender’s risk.
But even if you don’t have enough money saved up to afford a full deposit on the car you want, you may still be able to take out a car loan to buy it. Some lenders offer car loans with a higher Loan to Value Ratio (LVR), where you make a smaller up-front deposit and borrow a greater percentage of the car’s value. Other lenders offer 100% loans, where you borrow the full value of the car and pay no deposit.
These car loan options are more likely to charge higher interest rates to make up for the increased lender risk, so consider whether it would be more affordable to make these higher monthly repayments, or to save up for that initial deposit.
Checking your car’s financial history
If you’re buying a car that’s been owned before, it’s usually worth checking out whether it still has money owing on it from a previous owner, a.k.a a financial encumbrance. To check this, you can organise a Personal Property Securities Register (PPSR) report, previously known as a REVS check. It’s possible to organise one of these reports for yourself, however your lender may be able to save you some time and effort by organising one for you, though some lenders charge a fee for this service.
Compare Variable Rate Car Loans
Do you know what you’re looking for in a car loan? If flexibility is important to you, variable rate car loans could sound appealing. At RateCity, you can compare different car loan offers from Australian lenders, and work out which one will best suit your finances, based on its features and benefits.
Once you’re confident in your choice of variable rate car loan, all you need to do is contact the lender to get the ball rolling. Soon you’ll be able to drive away in a car of your own, and enjoy the extra flexibility it adds to your lifestyle.
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Personal Finance Editor
Mark Bristow is a RateCity's Home & Personal Finances Editor, and an experienced analyst, researcher, and producer. Working for over ten years, Mark previously wrote and researched commercial real estate at CoreLogic, and has seen articles published at Lifehacker and Business Insider, among others. Most recently, Mark has joined RateCity working across finance as a whole. Whatever the topic, Mark’s goal is always to provide simple solutions to complex problems.
Frequently asked questions
What is a variable-rate loan?
A variable-rate loan is one where the lender can change the interest rate whenever it wants. For example, if you sign up for a variable-rate loan at 8.75 per cent, the lender might change the interest rate to 8.90 per cent the month after and then 8.65 per cent the month after that. By contrast, 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.
What is an interest rate?
The interest rate is the price you have to pay for borrowing money. The interest rate is expressed as an annual percentage of however much of the loan remains to be paid. For example, if you took out a $10,000 car loan with an interest rate of 8.75 per cent, you would be charged 8.75 per cent of $10,000, or $875 of interest per year. But if you then reduced the outstanding loan to $9,000, your annual interest bill would be 8.75 per cent of $9,000, or $787.50.
What is a comparison rate?
The comparison rate is known as the ‘real’ interest rate you have to pay – unlike the advertised interest rate, which is often an artificially low number. That’s because the comparison rate includes both the advertised rate and the associated fees. According to the industry standard, comparison rate calculations are made on the assumption that the car loan will be for $30,000 over five years.
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.
Can I get a car loan with poor credit?
Poor credit doesn’t necessarily mean you won’t be able to get finance for your car purchase, though your options aren’t likely to be the same as someone with good credit.
In fact, a number of specialist lenders exist offering car finance for customers with poor credit, able to provide access to bad credit car loans.
However having a history of poor credit will likely mark you as a potential risk to lenders, so your car financing needs could see higher fees and interest rates. Alternatively, consider a secured car loan, which is a type of loan that uses the car you purchase as collateral, reducing the risk.
Other options include getting someone close to act as a guarantor for your car loan, or to talk to a broker about a personalised rate specific to your circumstances.
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.
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.
Can I get a discounted student car loan?
Being a student is tough enough, and while you might find the odd student discount on movies and technology, the same can’t be said about car loans, as you can’t really get a discounted student car loan.
Lenders make money on the interest and fees that they charge with loans, and the lowest interest and fees are given to the most reliable credit holders: people with excellent credit history.
As a student, you are unlikely to have enough on your credit report to warrant an excellent history. There are however, ways of getting a lower interest car loan if you can’t get an interest-free loan from the bank of mum and dad. One way of doing this may be through getting a guarantor car loan, which can get you a secured car loan by setting your parents up as guarantors.
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.
How much is your car worth?
If you already own a car, you could potentially bring down the cost by selling your car in the process. Before that happens, though, you’ll need to find out how much your car is worth.
One of the first places to find this value is to research the value of your current car, giving you an idea of roughly how much it’s worth in its peak condition.
There are plenty of websites that offer a free online valuation, allowing you to enter your car’s make, model, year, badge and description, with results listing a price guide based on both selling your car privately and through a dealership.
Of course, dealerships will try to profit on your trade-in by buying it for less than they can sell it, making it highly unlikely that you’ll get the same price selling a car to a dealer as you would selling a car privately.
However, private car sales can be costly and can take months to sell, making car trading more convenient with a guaranteed return, even if you may not be able to realise the total value of your car’s worth.
Remember that everything is negotiable. If the dealership is offering you less for your trade than you wanted, try to negotiate elsewhere to gain that money back. Start by negotiating on the price of the trade and then ask them if they can give you a further discount on your new car.
Can I buy a car as a student?
Buying a car is a huge financial decision, and shy of marriage and purchasing a house (or perhaps around the world travels), it may be the biggest financial decision you make. But if you’re looking at your empty pockets, don’t despair! Your dream of owning your own car could become a reality, if you look for and compare the right car loans for your circumstances.
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.
What is a car loan?
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.
Can I get a no credit check car loan?
You may be able to get a no credit check car loan in certain circumstances, although it’s important to weigh up your options before doing so.
Most lenders refuse to provide no credit check car loans, because they don’t want to give loans to borrowers without first confirming that they have a track record of repaying debts. So any lenders that do provide no credit check car loans would take measures to protect themselves against the risk of default.
That’s why no credit check car loans have higher interest rates than other car loans. Also, borrowers often have to provide security and put down a larger deposit.
Where can I find lenders who offer no credit check car loans?
You might be better off finding a specialist lender who will look at your credit history and income, who will decide whether or not you are able to responsibility pay back the loan. Alternatively, you could contact a car finance broker.
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 a loan-to-value ratio?
The loan-to-value ratio, or LVR, 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 a loan-to-value ratio of 75 per cent. Loan-to-value ratios 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 loan-to-value ratio would now be 67 per cent.