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What's new in car loans in March 2021

Despite motor vehicle spending intentions flatlining in the latest reporting period, total vehicle sales saw an increase in February 2021.

The latest Household Spending Intentions report released by Commonwealth Bank revealed that motor vehicle spending intentions trended sideways in January 2021, starting the new year with some moderation in the momentum evident in late 2020.

January 2021 saw a year-on-year decline in Google searches related to motor vehicles and a decline in motor vehicle loan applications, according to the report. 

The most recent lending indicators from the Australian Bureau of Statistics corroborated these findings for the January 2021 reference period. The indicators revealed that while the value of new loan commitments for fixed term personal lending rose 0.2 per cent over the month, the value of new loan commitments for road vehicles fell 3.3 per cent.

However, according to the latest new vehicle sales figures from the Federal Chamber of Automotive Industries (FCAI), a total of 83,977 vehicles were sold in February 2021, up 5.1 per cent on February 2020 when 79,940 vehicles were sold.

FCAI chief executive Tony Weber said the result showed that confidence was continuing to grow in the market.

“During the past four months we have seen an increase of 10.6 per cent in new vehicles, and this has been reflected with strong growth in NSW, Queensland, Western Australia, South Australia and the Northern Territory in February 2021,” Mr Weber said.

If you’re weighing up finance options for a new set of wheels, RateCity’s car loans leaderboard has a range of financing options available with competitive rates that could get you driving in no time.

Updated by Georgia Brown on March 5, 2021

What is a car loan?

A car loan is a specific type of personal loan that you can use to buy a new or used motor vehicle when your savings won’t cover the total cost upfront. When you take out a car loan, you will need to make regular repayments over a fixed term towards the lump sum you borrowed (the principal), as well as interest accrued. The interest rate will apply on the loan amount from the time you take out the loan.

It’s generally a good idea to spend some time comparing your options when it comes to choosing a loan, as the interest rate isn’t the only thing you should consider.

How do car loans work?

A car loan is a formal car finance arrangement between three parties: the buyer (you), the vendor (someone selling the car, typically a car dealership), and the lender (the organisation providing the money). You can get a car loan to buy a new or used car.

Car loans typically range from $5,000 to $100,000 and often have loan terms from one to ten years. Interest rates generally vary between 2.99% and 10% for secured car loans, and up to 15% for unsecured loans. The interest rate on a car loan can often be lower than on a personal loan as the loan is often secured by the car you are purchasing.

There are six steps involved in getting a car loan:

  1. Search and compare car loans to find one that best suits your needs
  2. Submit an application for the loan
  3. If your application is approved, the lender will agree to lend you a certain amount to buy a vehicle
  4. Sign a purchase agreement with the vendor
  5. The lender pays the vendor on your behalf
  6. You repay the lender, usually over a period of several years

Finding the best car loan for your needs is a key part of the process. Everyone's financial situation is unique, so there's no one "best car loan" to cover every possible need. To help you find your best car funding option, a comparison of car loans is critical to ensure your loan fits your particular needs.

So, where do you start? Once you know what sort of car you would like to buy, you’ll need to consider how much you can borrow before you start comparing loans.

Car loan benefits and disadvantages

What are the benefits of a car loan?

Using a car loan to help you buy a car today comes with many benefits, including:

  • You can use a car loan to borrow more money, opening up options for vehicles that you might not have been otherwise able to afford
  • You don't have to repay a car loan immediately, and can take as long as ten years to repay the loan
  • The car loan’s interest rate may be much lower than that of other finance options, such as an unsecured personal loan

What are the disadvantages of a car loan?

There can be some negatives to getting a car loan, which you will need to consider and weigh up against the benefits. These include:

  • Repayments need to be made regularly – if you stop repaying, you may lose the car, and potentially face other penalties, such as legal costs
  • Your car loan may have restrictions on the type of car you can buy, such as whether it is new or used, or a sports car
  • The amount you can borrow may be limited by your borrowing capacity and creditworthiness

Who can get a car loan?

To qualify for a car loan, you'll need to show a lender that you have a regular source of income to prove you can afford to make regular repayments. Lenders will want to know if you are employed and how long you have been with an employer. If you’re self-employed, a lender may require you to show two years’ trading history in order to qualify for a car loan.

The best-case scenario is that you have regular income and an excellent credit rating. You may still be able to qualify for a car loan if you're a student or a pensioner, though you may pay a higher interest rate than someone who is employed full-time.

Knowing your credit rating and credit history will give you a glimpse into what you can expect from car loan rates. If you have a bad credit history, there's still hope, but you just might be looking at bad credit car loans, where the rates may not be as competitive.

How much can I borrow with a car loan?

The amount you can borrow, or your borrowing capacity, depends on your income, your expenses, your assets and any other debts that you may hold. Your credit history is also relevant, as lenders use it to determine your creditworthiness. If you have previously defaulted on loan repayments or have often been late in making repayments, a lender may reduce the amount they are willing to lend to you, or even reject your loan application altogether.

If you want to take out a secured car loan, the amount you can borrow will also depend on the cost or value of the car. You may not receive as much from a lender to buy a used car as you would to buy a new car. In fact, some lenders might only issue secured loans on cars that are less than five years old, though others may consider certain used vehicles that are older.

Once you have an idea of what you’d like to borrow, you can use a car loan calculator to find out how much your repayments will be.

Are there any other costs to consider?

When calculating how much you can afford to borrow, it could be a good idea to factor in the other costs involved with buying and owning a car to ensure you are budgeting correctly. Keep in mind that even if you’ve previously owned a car, every car typically has different running and maintenance costs. These can include:

  • Stamp duty
  • Registration
  • Car insurance
  • Petrol costs
  • Regular services, maintenance and repairs
  • Road tolls

What type of motor vehicle can I buy with a car loan?

Generally speaking, almost all vehicles can be purchased with a car loan, but there will typically be restrictions placed on certain features such as the age, condition and value of the car you wish to buy.

New car loans, for example, are often only available to borrowers who plan to buy a car that is less than two years old, though some new car loans can be used to buy cars up to five years old.

There can also be restrictions on used car loans that require the car to be no more than 12 years old at the end of the loan term. Keep this in mind if you're considering buying a used car, as it may limit your options when choosing between different terms.

All vehicles including passenger vehicles, sports utility vehicles (SUVs) and utes will typically be considered for a standard car loan, while some will also be eligible for a more niche car loan. One example of this is as a green car loan which may be used to buy a hybrid vehicle, a plug-in hybrid electric vehicle (PHEV), a fully electric vehicle (EV), and even a vehicle that is simply more fuel efficient than average.

How do you compare car loans?

To compare car loans, make sure you are comparing apples with apples. That is, secured car loans must be compared with other secured car loans, and unsecured loans with other unsecured loans. It’s generally a good idea to consider the interest rates, any applicable fees and other loan features. Also think about considering the lender’s reputation and how good their service is.

If you factor the following details into your car loan comparison, you’ll likely be better equipped to work out which car loan best suits your needs.

1. Interest rates

Comparing interest rates tends to be an important first step in comparing loans. There are two parts to a loan’s interest rate: the advertised rate and the comparison rate. The advertised rate is just the interest rate you pay on the loan, while the comparison rate combines the advertised rate and the main fees, including any upfront and ongoing fees. Consider taking different advertised rates and different comparison rates into account when making car loan comparisons.

2. Fees

Car loan fees can often significantly impact how much money you have to pay out over the life of your loan. Fees typically include the following:

  • Application fees, also known as upfront fees
  • Establishment fees
  • Account-keeping fees, such as monthly fees or ongoing fees
  • Early repayment fees
  • Early exit fees
  • Redraw fees

Different Australian lenders will generally charge different fees to boost their bottom line, so it can be a good idea to ask about all of them.

Tip: Need more information on how to get the best car loan for your needs? Check the car loan guide right now.

3. Features

Car loans can vary quite a bit in terms of what they offer. It’s a good idea to consider asking about all of a loan’s features, as they can affect how much you will need to pay over the life of your loan. Some of these features include:

  • Fixed or variable: You will need to decide whether you want your loan’s interest rate to be fixed or variable. If your loan has a fixed interest rate, your repayments will be the same throughout the life of the loan, which could make budgeting more manageable. If you choose a variable interest rate, however, the rate can change during the loan’s term meaning your repayments could potentially increase or decrease.
  • Extra repayments: Some loans will allow you to make extra repayments additional to your regular repayments. Having the option to make extra repayments on your loan could mean saving money on interest and paying your loan off faster.
  • Redraw facility: Having a loan with a redraw facility means you are able to redraw any additional payments you have made, which can come in handy if you need to access some extra cash down the track.
  • Pre-approval: Some financing options will offer pre-approval, which is when the lender agrees to give you a loan to buy a car before you make the purchase. This can give you a better idea of the price range you are working with before you start shopping for a car.

4. Loan term

Some lenders are very flexible in how much time they’ll give you to pay off the loan, while others will limit your options. As a general rule, a shorter loan term will mean higher monthly repayments but a lower total loan repayment, while a longer loan term will mean lower monthly repayments but a higher total loan repayment, as you will be paying back more in interest costs. Ultimately, you need a car loan that you can repay comfortably, over a period of time that suits your needs.

5. Loan type

Some lenders will allow you to choose between a secured car loan and an unsecured car loan. Lenders will typically charge higher interest rates for unsecured car loans because they regard them as riskier than secured car loans.

6. The lender

There’s a good chance you already bank with one of Australia's big four: ANZ, Commonwealth Bank, NAB or Westpac. While they're big, they may not offer the best loan for your needs. Shop around and you may find a more competitive car loan from a smaller bank or a non-bank lender. 

What types of car loans are available?

There are a number of different types of car loans on the market, each of which meet specific financing requirements. Generally speaking, there are seven different ways to finance a vehicle:

  • Unsecured Car Loans: car finance where you don’t provide collateral
  • Secured Car Loans: car finance where you do provide collateral
  • Chattel Mortgage: a specialist car finance option for business use
  • Operating Lease: more like a long-term car rental arrangement, involving a company leasing a car for an extended period
  • Commercial Hire Purchase: closer to a rent-to-buy arrangement, generally involving a finance company buying a car on your behalf and letting you use it in return for regular rental payments. After a number of payments, you may own the car
  • Car Lease: similar to a commercial hire purchase, but with more options. You rent the vehicle for a set period and at the end of the lease, you either return the car or buy it
  • Novated Lease: like a car lease, but with a more complicated ownership structure, as you acquire the car from a second party (usually an employer) which in turn leases it from a third party (a finance company)

How to apply for a car loan

Applying for a car loan can be a simple process if you do your research and are well prepared. Here are six steps that could make the application process easier for you:

  1. Check your credit score: This should only take a few minutes to do through an online provider, usually free of charge. You’ll just need some identification such as your passport and driver’s license. Once you know your credit score, you’ll have a better understanding of which loans and interest rates might be available to you.
  2. Assess your budget: Use a car loan calculator to get an estimate of the total cost of the loan and what your car loan repayments could be. This could put you in a better position to make an informed decision.
  3. Search and compare car loans: RateCity allows you to easily compare a wide range of car loan options so you can find one that best suits your individual needs.
  4. Check the eligibility criteria: Once you have compiled a shortlist of potential car loans, check to see whether you meet all of the eligibility requirements. Keep in mind that these can differ from loan to loan. Consider reaching out to the lender if you are unsure about anything.
  5. Prepare your application: If you're already comparing car loans on RateCity, you can click directly through to the lenders website where you can apply online for your chosen car loan. It might be a good idea to have all of your required documentation ready before you get started.
  6. Submit your application and await a decision: Once you submit the information required, you may receive an immediate response from the lender with an update of your application status, or this may take a little longer. Car loan approvals can happen in as little as a few hours to as much as a few days.

What is the best car loan?

The best car loan is a car loan that meets all your needs, taking into account price, features and benefits. Shopping around and making car loan comparisons is a key part of the process. There are dozens of car loan providers in Australia, and you shouldn't assume your current bank will offer you the lowest interest rate or the most suitable loan for you. RateCity allows you to compare car loans by costs and features and can also considerably reduce the time it takes for you to do your research.

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Frequently asked questions

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.

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.

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.

What is proof of residence?

Before giving you a car loan, lenders will ask for proof of residence – documentary evidence that you live where you claim you live. Lenders will typically want some combination of utility bills, bank statements, mortgage documents or driver’s licence. The reason lenders want proof of residence is to verify your identity and credit history.

What is residual value?

The residual value of a car is how much it will be worth at the end of a lease period. Finance companies need to calculate a car’s residual value before they can know how much to charge during the lease period. For example, if a financier calculates that a $30,000 car will have a residual value of $16,000 at the end of a five-year lease, the financier will know that it must charge $14,000 to break even on the lease – and more to make a profit.

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 resale value?

The resale value is the price you could realistically charge if you were to sell your car. Almost every car loses value each year, although at different rates. As a guide, cars depreciate on average by 14 per cent per year in the first three years and then eight per cent per year after that.

What is a finance broker?

Finance brokers help borrowers organise car loans with lenders – that is, they act as middlemen between borrowers and lenders. While lenders will only recommend their own products, finance brokers recommend products from a range of lenders. Finance brokers need to be accredited with a lender to do business with that lender; a typical broker will be accredited with between 10 and 30 lenders. Finance brokers generally don’t charge consumers; instead, they receive commission payments from lenders.

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.

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 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 to apply for pre-approval of a car loan from RACV?

If you’re planning to apply for a car loan with RACV, the best way to start is by having a clear picture of your requirements. By getting pre-approval on your car loan, you’ll be able to go shopping for your new car with a definite budget that will help you narrow your search. Once you’ve decided to buy a car with the help of a loan, you may have even identified the type of car you would like to purchase, you can seek pre-approval on a car loan from RACV. 

You can apply for pre-approval by filling out a form online and uploading the relevant documentation regarding your identification, income, debt and credit history. Once you submit your application, RACV will review and verify the documents. If you meet their eligibility criteria, you will get pre-approval for the amount they are willing to lend to you. With this pre-approval, you can go car shopping with the confidence of knowing what you can afford.

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 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 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.

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 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 to get pre-approval for your ANZ car loan?

Getting pre-approval on your car loan can give you a good idea of how much you may be allowed to borrow. This will help you set your limits while selecting your car. You can apply for pre-approval for an ANZ car loan by filling out a simple online application form, where you’ll have to submit relevant identity, employment and income documentation. 

ANZ will then conduct a credit check based on your application and documentation. It’s important to note that this could have an impact on your credit history. Based on your credit and income documentation analysis, ANZ will provide an amount they are willing to give you as a loan. After this, you can find the right car that matches the proposed loan amount and send it through your final loan application. 

It’s important to remember that pre-approval gives you an indication of how much you can borrow from ANZ to purchase your car, but it doesn’t guarantee the final approval. 

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.