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How to find a low-interest car loan
Whether you’re looking for a personal loan or a home loan, it’s usually worth looking for one with a low interest rate, so you can pay less from month to month and over the lifetime of the loan.
Car loans are no different, and while it's useful to compare the features of any car loan, it’s also worth comparing the other features offered by a low-interest car loan, to make sure you’re getting a deal that’s right for you. That’s because when you also look at a low-interest car loan’s fees and features, you might find that the cheapest loan isn’t always the best.
What is a car loan comparison rate?
One important point to remember when searching for low-interest car loans is that the advertised interest rate might be different from the ‘real’ rate you pay. That’s because car loans can become significantly more expensive once you include the cost of fees.
As a result, you should also consider the ‘comparison rate’, which combines the advertised interest rate with any associated fees. Please note, though, that the comparison rate will be calculated on a car loan of $30,000 over five years – so it might be slightly inaccurate if your loan is different.
Once you do that, you might discover that some low-interest car loans aren’t as cheap as they initially seem. You might also find that some car loans with a higher advertised rate might work out costing you less over the life of the loan.
Remember that a car loan’s comparison rate only summarises its standard fees and charges, and may leave out other costs associated with a particular loan. Also, the comparison rate doesn’t account for the extra features and benefits that could influence your decision, so be sure to do a little extra research settling on a low interest car loan.
What is a secured car loan?
To get the lowest possible interest rate on your car loan, you’ll need to prove that you’re a relatively safe risk for the lender. Having a stable income and a good credit history can be a big help, but so is opting for a secured car loan.
In this arrangement, the balance you borrow is guaranteed against the value of the car you’re buying. Even if a borrower doesn’t pay back a lender, the lender can still make up this loss by repossessing and selling the borrower’s car. This extra financial security for lenders often translates into lower interest rates for borrowers.
What is an unsecured car loan?
That said, qualifying for a secured car loan isn’t always easy, as lenders want to be confident that the car’s value will cover the financial losses of a potential default. Thus, secured car loans may not be available for certain car models, or cars over a certain age, depending on the lender.
If the car you’re looking at doesn’t qualify for a secured car loan, or if you’d prefer not to risk losing your car if repaying your car loan becomes a problem, you could instead opt for an unsecured car loan, which will likely have a higher interest rate.
How do I find cheap petrol?
Want to find out real-time petrol prices near your home and work? You can use apps like FuelMap, MotorMouth and PetrolSpy. If you live in Sydney, Melbourne, Brisbane, Perth or Adelaide, the Australian Competition & Consumer Commission website will tell you whether now is a good time to buy, based on your city’s petrol cycle. Alternatively, if you want to see how prices have trended over the past few months or years, use the Australian Automobile Association website.
What is a variable car loan? What is a fixed car loan?
Once you’ve identified your preferred low-interest car loan, the next step is to make sure you can afford it over the life of the loan. Don’t forget that variable car loans can change at any time – the interest rate could go down, but it might also rise.
However, if you choose a low-interest car loan with a fixed interest rate, the rate will remain unchanged during the fixed-rate period. So even if variable rates go up, your fixed-rate car loan will maintain the same low interest rate, with every repayment bringing you one step closer to owning your car outright.
If you believe that interest rates are likely to fall, you might be better off going for a variable car loan after all. But just make sure that you have financial buffers in place so that you can keep paying the car loan if – contrary to predictions – your rate actually increases.
How to save money on your car loan
If one of the reasons you’re looking for a car loan with a low interest rate is to avoid paying a lender too much more on top of your car’s value, it might be worth considering making additional payments on your car loan.
By getting ahead in your car loan repayments, you’ll be bringing yourself closer to getting it fully paid off and making an early exit from the loan, which should reduce the total amount of interest you’ll need to pay over the lifetime of your loan, saving you money.
However, this isn’t a valid option for every low-interest car loan. That’s because some lenders charge fees for making additional repayments or exiting a loan early, to compensate for the interest payments they’d be missing out on. This is something to check before you take out the loan.
Fixed-rate car loans tend to carry more restrictions, often locking borrowers into tight repayment plans. Variable rate car loans tend to have more flexible repayment arrangements, though some lenders do still charge these fees. Again, make sure you’re familiar with the car loan’s terms and conditions before signing on.
What is a car loan redraw facility?
If your low-interest car loan allows you to easily make extra repayments, there’s sometimes an added benefit beyond just bringing you closer to exiting your loan early. If your car loan also includes a ‘redraw facility’, you’ll be able to claim back (or redraw) the extra money you’ve paid onto your car loan if required.
As well as adding extra flexibility to your car loan, a redraw facility can help you make those extra repayments with confidence – you’ll be able to get ahead in your loan without locking up your spare cash in your loan and losing access to it altogether.
Please note, though, that redraw facilities often come with conditions attached. For example, you might have to pay a fee every time you redraw money. Also, there might be limits on how much you can withdraw within a certain time period.
Who offers car loans?
- Big four banks – ANZ, Commonwealth Bank, NAB and Westpac
- Mid-size banks – Suncorp Bank, Bankwest, Bank of Queensland, St George and others
- Mutual banks – IMB Bank, Beyond Bank, Bank Australia, Greater Bank and others
- Credit unions – CUA, BCU, My Credit Union, Community First Credit Union and others
- Non-bank lenders – 360 Finance, loans.com.au, DirectMoney, PrimeEdge Car Loans and others
Do you need a deposit for a low-interest car loan?
If you’re hoping to get a low interest rate on your car loan, you’re more than likely going to need to pay the full deposit required by your lender, to better ensure your loan’s security and reduce the lender’s financial risk.
While some lenders offer loans that require only smaller deposits or even no deposits, these loans represent higher financial risks to their lenders, which means higher interest rates. So if you have your heart set on a low-interest car loan, it’s usually worth making sure you have some savings available for a deposit.
How to check a car’s financial history
If you’re buying a car that’s been owned before, even if it’s young enough to count as ‘new’ for the purpose of taking out a car loan, it’s usually worth applying for a report on its financial history from the Personal Property Securities Register (PPSR), formerly known as a REVS check.
This will let you know if the car still has money owing on it from a previous owner (also known as a financial encumbrance). While you can organise one of these reports yourself, your lender might be willing to do this for you during the loan application process – although you might have to pay a fee.
How to compare low-interest car loans
At RateCity, you can find a wide range of car loans available from a variety of lenders, and organise your options to find the car loans offering the lowest advertised interest rates and comparison rates.
Remember, though, that a low interest rate shouldn’t be all that you look for on your car loan – take a closer look at the features and benefits offered by different lenders to work out which car loan will provide you with the most value for your financial situation.
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Frequently asked questions
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.
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.
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.
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 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 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 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 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.
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 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 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 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 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.
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.
Can I get a car loan with bad credit?
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.
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.
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.