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Whether it's to get to work, take the kids to school or take to the open road, owning a car is essential for many Australians. If you want to buy your first car or upgrade to a new one, a car loan may help turn your dreams into reality.
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How do Australian car loans work?
Australia's car loan market is very competitive, so there are lots of lenders and loan types to choose from. There are various ways you can get a car loan. You can go directly to the lender, or you can use a comparison website, a finance broker or a car dealer.
Whichever you choose, the loan provider will purchase the car for you and you then pay back the lender the cost of the car, plus interest costs, over a set period of time, usually three to five years. The car loan will allow you to eventually own the car outright.
A car loan will include:
- Interest rate – e.g. 7.95 per centf
- Interest type – variable or fixed
- Loan size – e.g. $30,000
- Loan term – e.g. 5 years
- Loan type – secured or unsecured
- Loan repayments – weekly, fortnightly or monthly
- Loan fees – establishment, account-keeping, redraw, late payment and/or early repayment fees
What types of car loan are available
The two main types of car loans are secured or unsecured loans. Read more about these loan types to find out which one is best for you.
There are many factors that go into choosing a car loan, including deciding whether you want an interest rate that is variable or fixed. Features may include the option to make flexible repayments or introductory offers with low interest rates for a fixed period.
How do you find the best Australian car loan?
The best way to find the right car loan for you is to do your research. Decide what type of loan you want, the feature that you need, then use comparison tools, such as tables and calculators, to narrow down your options.
Do you want a fixed interest rate or variable one? Do you want the flexibility of being able to make extra repayments or redrawing extra repayments? Comparison tables allow you to filter down loan options until you have a personalised list to choose from.
Is the cheapest Australian car loan the best?
The cheapest loan (or one with the lowest advertised rate) may not necessarily be the best option for you. This is why looking at the comparison rate is a helpful way to gauge what you’ll actually pay.
Comparison rates help determine the real cost of the loan. They include the interest rate as well as most applicable fees and charges.
ASIC’s MoneySmart provides a helpful table explanation:
|Interest Rate||Fees & Charges||Comparison Rate|
|Car Loan A||8%||0.5%||8.5%|
|Car Loan B||8.25%||0.1%||8.35%|
Note: table amended to reflect car loan rates.
Car loan B may have a higher advertised rate, but it will end up costing you less than car loan A. This is how comparison rates can be a helpful tool in choosing your car loan.
Keep in mind that if you also a flexible loan, such as having a redraw facility, you may be charged a higher interest rate. It all depends on what kind of loan you want.
What Australian car loan can you afford?
The car loan you can afford will depend on your personal circumstances. Use a car loan calculator to determine potential loan repayments and decide if you can afford them.
Your application may be rejected if the lender believes you can’t afford the loan. Use a calculator before you apply to minimise your risk of rejection, as this can negatively impact your credit history. Your credit history is checked during the application process. If you have a poor history, consider taking steps to improve it before you apply for a loan.
How to apply for an Australian car loan
After you’ve decided on your dream car and car loan, here’s how you can apply for it:
Do a quick credit score health check to avoid any nasty surprises. You never know what could be in your credit history. Sometimes the debt defaults of family or others with a similar name to yours can accidentally be applied to your credit history.
Use a car loan calculator to confirm you can afford the potential loan repayments. If you’re buying a car for your family, consider what percentage of your take home pay the repayments will be, and whether this is doable if you lose your job.
Organise your paperwork. You will need to show the lender personal identification (such as your license or passport), proof of income, copies of bank statements, copies of bills, and information on any debts you may have (such as credit cards). You’ll also need to provide information about the car you want to buy.
How long does it take to be approved for a car loan?
Most lenders offer online application, which can take up to 15 minutes to complete. This makes the process a lot quicker than going to a bank branch to apply for a car loan.
While the application process may be speedy, your approval may not be. Lenders may take a few hours or days to respond. Approval from the big four banks can take between one and three business days.
Can I get pre-approval for a car loan?
Much like with a home loan, it is possible to get pre-approval for a car loan. Typically, you’ll choose the car you want from a dealer or used car lot and then apply for car loan finance.
With car loan pre-approval you’ll be able to walk into a dealership with the confidence of knowing exactly how much you can borrow. This can be a helpful strategy when negotiating the car price.
However, as with a home loan, your pre-approval will only be for a set time frame.
The pre-approval application process is the same as applying for a car loan. However, as pre-approval is not always offered, may need to ask specifically for pre-approval on a loan.
Alex Ritchie is a writer and PR professional at RateCity, and has been writing about finance for three years. She is passionate on topics such as gender pay and superannuation gap, and committed to helping young Aussies manage their finances better. Before RateCity, Alex spent time as an editor for magazines and has seen her work published in numerous print and online outlets.
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Frequently asked questions
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.
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 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.
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.
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.
What is a loan term?
The loan term is the amount of time the lender gives you to repay the car loan. For example, if you take out a $20,000 car loan with a five-year loan term, you would be expected to pay off the entire $20,000 (plus interest) within five years.
What is the role of a guarantor on a car loan?
The role of a guarantor on a car loan is to meet repayments if the borrower of the loan were to default for any reason, such as not being able to afford it.
Useful for loan applicants with poor or bad credit, a guarantor makes it possible for these loans to be made secure, because there’s less risk for a lender overall.
Companies will likely give fair warning before they charge a guarantor for the costs of the loan, or before they repossess anything of the guarantor’s that may have been used as security. Still, it is important for a car loan guarantor to fully understand their responsibilities before they commit to the transaction.
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 are loan repayments?
Loan repayments are the regular payments you make to pay off your car loan. Loan repayments generally occur on a monthly basis, although many lenders will also give you the option of making fortnightly or weekly loan repayments.
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.
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.
Can you get a car loan as a single mum?
Getting a car loan can be tricky if you’re a single mum, but it’s not impossible. Juggling your finances can be difficult, particularly if you are reliant on a sole income or on Centrelink payments (or a combination of the two), and having a car is a necessity rather than a luxury for many who have to look after children. Luckily there are specialist providers and services that can help you get the loan you’re after, even if you’re in a tough spot financially.
I’ve been denied a car loan before; can I still get car finance?
Even if you’ve been denied a car loan before, you might still be able to get car finance. The key is to make the right application to the right lender.
The ‘right’ application is one that makes you look like an acceptable risk, which might include things like improving your credit score, increasing your savings rate and accumulating a bigger deposit.
The ‘right’ lender is one that deals with borrowers like you. For example, while some car loan lenders only deal with good credit borrowers, there are others that specialise in bad credit or poor credit borrowers.
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.
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 depreciation?
Depreciation is the reduction in the value of 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.