Car loans

Shopping around for the best car loan could save you thousands of dollars in fees and interest charges.

Choosing the best car loan for you

If you get a personal loan to purchase a new or used car, you repay the loan and interest over a fixed term, usually between one and seven years.

Most people shop around before choosing a car – so do the same when choosing a car loan. It can save you a lot of money in the long run.

Compare loans before you shop for a car

It's important to look at loans before you find your next car! Three important things to compare are:

1. car loan features,
2. car loan fees, and
3. the car loan interest rate

You can compare car loans from your own bank with other banks and financial institutions, and car dealerships (if you’re buying a car that way).

People selling cars can use high pressure sales tactics, so knowing more will help you to negotiate better. It’s good to know:

• exactly how much you can spend (factoring in other costs of buying and running a car)
• the best interest rate you can get
• how much your repayments will be

Knowing what’s available will help you budget for the cost of the car loan.

 

 

Car loan features

 

The features you choose will make a difference to the cost your loan. Here are three car loan features to weigh up.

1. Secured or unsecured loan

Car loans can be secured or unsecured.

• A ‘secured loan’ means, if you don’t meet your loan repayments the lender can take your vehicle and sell it to cover the loan.
• An ‘unsecured loan’ means your car isn’t security for the loan – so the lender can’t seek to repossess it and sell it. But the interest rate on an unsecured loan is often higher than a secured loan.

2. Balloon payment

Some car loans offer a ‘balloon payment’ (also called a residual payment). This option means you:

• pay off part of the loan in your regular repayments
• then, pay a final lump sum at the end of the loan - this is the balloon payment.

This may look like a good deal as your monthly payments will be smaller. But you'll have to repay the lump sum with interest, so the total cost of the loan is generally higher.

Before you choose a balloon payment, be confident you’ll have enough money to pay it when it’s due.

3. Guaranteed Future Value (GFV)

A guaranteed future value feature is an option where you can return the vehicle for a guaranteed value at the end of the agreed loan term and chose to upgrade, keep or return the vehicle.

This feature will have conditions to realise the full trade-in value. For example:

• a limit on the agreed kilometres you can drive, and
• returning the vehicle in good condition that isn’t beyond fair wear and tear.

Car loan fees

As well as the interest rate, there are a lot of fees that affect the total cost of your car loan. Common car loan fees are:

paid Establishment fee - a one-off fee charged by the lender for the administrative costs of setting up the loan.

paid Broker fee - a one-off fee charged where a broker is involved in arranging finance–this fee must be disclosed on the finance contract.

paid Dealership or introducer fee – a one-off fee charged by a party who introduces consumers to a lender – this might be a car dealership. It is charged to cover the administrative costs of assisting with your loan application and referring you through lenders channels.

paid Other fees – these can include a monthly service fee, a default fee or missed payment fee, and extra ‘default’ interest that may be charged.

Car loan interest rate

The interest rate that you’re offered on a car loan can depend on the loan features that you choose, the length of the loan, your personal credit score and the car you’re buying.

You can also choose between a fixed or variable interest rate on a car loan. Your choice can have a big impact on your loan repayments and the total amount you pay for the loan.

• A ‘fixed interest rate’ means the interest rate and your car loan repayments won't change. You'll know exactly how much you pay each repayment.
• A ‘variable interest rate’ means your car loan repayments can change if your lender’s variable interest rates change. If your lender’s variable interest rates rise, your repayments will be higher, but if they fall, your repayments will go down.

Variable rate car loans usually don't have an early exit fee. This might be better if you're planning to make extra repayments and pay the car loan back early.

You can use our personal loan calculator to work out your car loan repayments, and how much you can save by making extra repayments.

How to compare car loans

Ask for the comparison rate

When you’re looking at car loans the lender must give you the comparison rate for the loan. This is a single figure for the cost of the loan that includes the interest rate and fees. It helps you compare one loan against another.

Just make sure you're comparing the same loan amount and term when you look at comparison rates!

Your car loan checklist

Use this checklist before you sign up for a car loan, to help make sure the loan you choose will be right for you.

check_box Have I weighed up the pros, cons, and cost of the loan features I’m considering?

check_box Do I know the cost of all the fees I might be charged?

check_box Will a fixed or variable interest rate work best for me?

check_box Do I know how long I’ll be paying the loan for? (The loan term)

check_box Have I looked at the comparison rate of several loans, to work out the cheapest option for the type of loan I want?

check_box Am I confident I can afford to pay the loan back, even if my situation changes?

check_box Have I factored in the other costs of a car, like stamp duty, rego, insurance and running costs?

Know that help is available. If you are having trouble meeting your car loan repayments, you can talk to a financial counsellor about your options.