Why taking out a car loan through your regular bank might be a bad idea
A range of online lenders, credit unions and challenger banks are offering lower car loan interest rates than the big four banks.
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A range of online lenders, credit unions and challenger banks are offering lower car loan interest rates than the big four banks.
So you’ve decided to buy yourself a car - congratulations! The next step for many Australians is finding car finance that suits their needs. It's important to know that everyone's needs are different, and car loans come in all shapes and sizes.
Fortunately, RateCity compares a wide range of low interest and flexible car loans for a variety of borrowers. There are many questions that can help you get to the right answer on your car loan comparison journey, such as who can get a car loan, what makes for a great car loan rate, and what the best car loan rates are.
A car loan is a loan that you can use only for purchasing a vehicle, such as a car, motorbike, van, truck or campervan. Car loans generally range from $5,000 to $100,000 and have loan terms lasting from one to 10 years.
When you take out a car loan, you not only have to repay the lump sum (or principal) you borrowed, you also have to pay interest (which is the price you pay to ‘buy’ the lump sum). This interest is a percentage of however much of your loan is still outstanding.
Car loans work by creating a formal financing arrangement between three parties - the buyer (you), the vendor (usually a car dealership) and the lender.
Getting a car loan isn't generally a complicated process, and there are four steps involved:
Finding the best car loan for your needs is a key part of car loan process, and that means it's time to look at car loan comparisons to find the most suitable car finance for your next purchase.
If you already know what car you want, then you should only need to borrow the value of that car. You could possibly add a little more to your car loan to cover extra costs such as insurance, but the less you borrow on your car loan, the smaller your monthly repayments, and the more money you will save in interest and fees.
The other option is to calculate the maximum car loan total you can afford to repay, and then go car shopping with this budget in mind. But take care not to blow your entire budget on a more luxurious vehicle than you need, increasing how much you pay long term on your car loans.
Choose a car with your head, not your heart, and you could ultimately enjoy a more affordable deal and a better car loan experience.
If you want the best car loan, you need to shop around. There are dozens of car loan lenders in Australia, so you shouldn't assume your current bank will offer the best car loan for your needs.
A comparison website like RateCity is a great way to research the market, finding the best car finance for your needs. You can use RateCity to sort loans through several filters, including:
By comparing and contrasting a wide range of car loan options, you can find the best car loan for your needs.
It's easier to qualify for a car loan than a home loan, but that doesn't mean everyone automatically gets approved for the car of their dreams.
To get a car loan, you will need to prove to the lender that you have the ability to repay the loan, which in turn means proving that you have a reliable source of income.
The best-case scenario is that you have a full-time job, a high income and an excellent credit rating. However, you may still be able to qualify for a car loan if you're a pensioner or if you have bad credit. However, in that scenario, you'll probably be charged a higher interest rate than a 'prime' borrower.
There are five main ways to compare car loans:
1. Interest rate
All things being equal, a car loan with a lower interest rate is generally better than a car loan with a higher interest rate.
That said, make sure you look at both the advertised rate and the comparison rate. The advertised rate will often be prominent. The comparison rate, though, will often be less visible - because it's usually higher than the advertised rate.
The advertised rate is the interest rate you pay on the loan; the comparison rate combines the advertised rate and the main fees, so it generally provides a more accurate picture of the total cost of the car loan. That's why some lenders make the comparison rate less prominent.
Ignore fees at your peril, because fees can significantly impact how much money you have to pay during the life of your loan. Fees may include:
All things being equal, the more features a loan has the better, because these features can make it easier for you to manage your repayments and even save you money. Two common features of car loans are:
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 and lower total repayments, while a longer loan term will mean lower monthly repayments and higher total repayments. Imagine you took out a $30,000 loan at an interest rate of 9.75 per cent - here’s how your repayments would look under three different loan terms:
|Loan term||Monthly repayments||Total repayments|
Some lenders will allow you to choose between a secured car loan (a loan in which you provide collateral, such as the vehicle you’re buying) and an unsecured car loan (no collateral). As a general rule, lenders charge higher interest rates for unsecured car loans, because they regard them as riskier than secured car loans.
Unfortunately, there is no ‘normal’ interest rate on a car loan, because rates move up and down all the time in response to market conditions and competition.
Generally, if the Reserve Bank of Australia (RBA) increases or decreases the official cash rate, car loan lenders will increase or decrease their own interest rates.
Car loan lenders also change their interest rates independent of the RBA. Sometimes, they might independently lower rates to entice more customers. At other times, they might independently increase rates to cash in on their existing customers – to earn more money from the same people.
Just as there’s no ‘normal’ interest rate on a car loan, there’s also no ‘best’ interest rate for a car loan.
Why? There are two main reasons:
Lenders offer different interest rates depending on loan size, loan term, deposit size, security, car type and various other variables. So a lender might offer one interest rate for a $10,000 unsecured loan for a used car and a different rate for a $25,000 secured loan for a new car.
Another point worth mentioning is that your financial position will change from time to time. For example, the last time you bought a car, you might have needed that first ($10,000 unsecured) loan, whereas this time you might need the second loan. So what was best for you might not be best for you now.
Furthermore, lenders often change their car loan interest rates – sometimes due to market forces and sometimes due to the pressures of competition. What that means is that whatever product offers the best interest rate today might not offer the best interest rate tomorrow.
There are seven different types of car loan:
There are two things you need to do if you want the lowest interest rate:
1. Shop around
There are dozens of different banks, credit unions, building societies and non-bank lenders that offer car loans in Australia.
Given how big and competitive the market is, you should do some research if you want to find the best car loan with the lowest rate.
2. Make yourself a less risky borrower
Lenders often give lower interest rates to borrowers they regard as less risky. Here are seven things that might make you less risky in the eyes of some lenders:
One final point: the car loan with the lowest interest rate may not be the best car loan for your specific circumstances. Be sure to compare car loans to find the best loan to suit your needs.
The cheapest car loan isn’t always the best, for two reasons:
1. A cheaper loan might actually be dearer or more expensive in the long run
Sometimes, the reason lenders can afford to charge such low interest rates is because they make back their money on fees. Imagine you were comparing two $30,000 five-year car loans - in the hypothetical example below, the loan with the higher interest rate actually costs less over the life of the loan than the loan with the lower interest rates.
|Interest rate||Application fee||Monthly fee||Total repayments|
2. A cheaper loan might be an inflexible loan
Do you want a redraw facility? Do you want to be able to make extra repayments? Do you want to reduce your interest costs by paying off your loan ahead of schedule?
Some car loans offer these options. But other loans - including some low-rate loans - aren’t as flexible.
That’s why the cheapest car loan might not suit your circumstances as well as a loan with a higher interest rate.
When comparing car loans, try to get an approximate idea of how much you can afford to pay back each month. You can then use this figure to help you determine which car loans may be the best for you.
Consider using a calculator to help you work out this amount, working out the amount you can comfortably pay back on your car loan. No one wants to feel the stress of being unable to pay their bills, and the consequences can be bigger than just missing a payment and feeling guilty; it could affect your credit score.
Remember that if you opt for a car loan with a variable interest rate, your repayments could go up or down from month to month, so if you’re planning your budget in advance, it’s worth leaving a bit of wiggle room just in case of surprise increases to car loan rates.
If you’d rather not risk being left out of pocket by car finance rate rises, you might consider a fixed-rate car loan, where the interest rate stays the same for the lifetime of the loan. While you won’t enjoy savings from interest rate cuts, at least you’ll enjoy the security of knowing exactly how much you’ll be paying per month.
If you want to lower your monthly repayments, you could opt for a longer loan with smaller instalments. Just keep in mind that if you choose a longer car loan term, you’ll ultimately pay more in interest over the lifetime of the loan, costing you more in total than if you’d made larger monthly repayments over a shorter period.
It’s also worth remembering that for many car loans, you won’t just be paying interest, but additional fees and charges as well, such as application fees and ongoing fees. To get a better idea of which car loans are likely to cost you more in total, check out their ‘comparison rates’.
Comparison rates combine the advertised car loan interest rates with their standard fees and charges, and express them as a percentage. Remember that a car loan’s comparison rate might not include its every cost or account for its extra features, so use the comparison rate a guideline and not as a decision-maker.
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Doing your search on the car choices and car loan selections can help make car financing easier than without. In fact, once you have your research on hand, you can do the following to help you qualify for a car loan:
Many car loans are 'secured', which means that if you can’t make your repayments, the lender can recover its losses by repossessing an asset of yours – usually the car you’re buying. These loans often have lower interest rates, as they represent less risk to the lender, though some lenders only offer secured loans for cars that fit certain criteria.
If the vehicle you’re looking at isn’t eligible for a secured loan, some lenders offer ‘unsecured’ car loans, where your shiny new (or used) vehicle is not at risk of being repossessed, but you may have to pay higher car loan rates instead.
While you may need to pay more up front for a brand new car, lenders tend to consider new cars to be less of a financial risk than used cars, because they’re of a higher quality and enjoy a higher resale value. So you may enjoy a more competitive interest rate on a car loan for a new car.
Conversely, a car loan for a used car might attract a higher interest rate, because the loan is seen as a greater risk. That said, used cars are often cheaper than new cars and tend to depreciate at a slower rate, balancing the scales somewhat when it comes to car financing.
Different lenders use different criteria to definite ‘new’ and ‘used’. Some may use two years as a benchmark – any younger is new and any older is used. Some lenders also have a maximum age for vehicles they’ll offer loans for (e.g. five years), as vehicles older than this are considered too high-risk.
There are five steps in getting a car loan approved:
If you find yourself with some extra money available, possibly because of a tax refund, you might be able to add that extra cash onto your car loan.
By making higher or additional repayments, you can get closer to exiting your car loan early, and reduce the total amount of interest you need to pay.
Just remember that some lenders charge fees for making additional payments and/or making an early exit from your loan, to make up for some of the lost interest. These fees and charges tend to be more common for fixed-rate car loans where your repayments are scheduled well in advance, but always check first before taking out a car loan.
A ‘redraw facility’ is another handy feature to keep an eye out for if you’re thinking of adding extra money onto your car loan. If you find yourself in a tight financial spot, a redraw facility will allow you to reclaim any extra money you’ve paid onto your car loan, freeing up your car financing to cover unexpected expenses.
This extra flexibility can allow you to pay extra towards your car loan with confidence, as you’ll be able to access these funds again if you really need them. Just check your lender’s terms and conditions, in case there are restrictions on how the redraw facility can be used.
The top brands by number of registrations are...
Source: ABS Motor Vehicle Census 2018
If you have your eye on a particular car but don’t have enough money for a full deposit, it doesn’t mean that vehicle is out of reach. Some lenders offer car loans with a high loan-to-value ratio (LVR), where you pay a smaller deposit and borrow a greater percentage of the car’s value.
Some lenders also offer 100 per cent car loans, where you pay no deposit and instead borrow the full value of the car. These offers typically involve higher interest rates due to the increased risk to the lender, so check whether you can afford the repayments to determine if a 100 per cent car loan is right for you.
When making a car loan comparison, the best car loan for you is one that not only has the features you want, but is also one you can afford. So do your sums with loan sizes and interest rates before signing on the dotted line.
By comparing the car loan offers at RateCity, you should soon be able to narrow down your car financing options to just the car loans offering the terms that best suit your needs. That way, you can be confident that the loan you take out is just as good as the car you buy.
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.
One thing to bear in mind is that lenders who offer no credit check car loans are likely to charge higher interest rates and higher fees than on car loans that include a credit check. Also, lenders who no credit check car loans might expect you to pay a higher deposit. You might also be expected to provide security.
Lenders regard no credit check car loans as riskier than other car loans, which is why it’s a niche product that often features special conditions.
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.
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.
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.
A bad credit car loan is a car loan for borrowers who have ‘bad credit’ or a bad credit history.
Some lenders refuse to offer bad credit car loans, because they believe there is an excessive risk that bad credit borrowers will not repay their loans. However, other lenders are willing to provide bad credit car loans.
Generally, these lenders charge higher interest rates for bad credit car loans than ‘prime’ car loans, reflecting the higher level of risk. Bad credit car loans may also have higher fees than prime car loans.
However, the big advantage of a bad credit car loan is that it allows borrowers with bad credit to access finance. Another advantage is that it could help bad credit borrowers improve their credit rating, assuming they make all their repayments on time.
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.
Yes, you can get a car loan with bad credit, although you’ll probably find the process trickier and dearer than that experienced by people who have good credit histories.
You can find a number of lenders that specialise in bad credit car loans. However, make sure you compare bad credit car loans before you sign on the dotted line, because not all car loans are alike and having bad credit may mean you are more likely to be hit with higher fees and interest rates.
If you have bad credit, it’s important not to take out a car loan unless you can afford the repayments because a default could further damage your credit rating. Conversely, if you make all the repayments and repay the loan successfully, your credit rating might improve.