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Car loans can work differently depending on what type of loan you take out and what kind of car you're looking to purchase.
Generally, the following steps will apply:
The type and age of the car you want will influence which loans you may be eligible for. If you're after a new, used or older car, find out how this can affect your options below.
Newer cars are deemed to be a lower risk and so you may be able to receive more competitive interest rates if you want to purchase a new car. The vehicle is likely to retain most of its value for the majority of the loan term, and because it is used as collateral security, it's in the lender's best interests if the car has a chance of selling for a good price.
Lenders may consider any car under 2 years old to still be a new car, so be sure to check the terms and conditions of several loans. It may also be dependent on the number of kilometres displayed on the odometer.
You can still get a secured loan if you want to buy a used car, but watch out for restrictions on the age of the car. Interest rates tend to be a little higher on these types of used car loans, which means if you're looking to purchase a used car, it's even more important to do a car loan comparison.
If the car you want to purchase is more than 5 years old, the bank may be unlikely to use your vehicle as security for the loan as its value may not be retained. Instead, the lender may suggest you apply for an unsecured personal loan. If the car is not used as security, the lender can't repossess the vehicle if you stop making your repayments, so this type of loan is considered riskier and interest rates can be higher.
A variable rate car loan will mean the interest rate you pay on your loan amount will change according to the market. If interest rates go up, it's likely your repayments will also go up to cover the additional interest charges. If rates go down, your repayments should also be reduced. A variable loan can be quite flexible, but it can also be harder to budget for repayments if they begin to vary from month to month.
A fixed rate car loan lets you lock in the interest rate for the duration of the loan. As the interest rate doesn't change over the loan term, your repayments will also stay exactly the same. This makes it much easier to budget for repayments each month. However, the fixed rates available from most lenders tend to be higher than the variable rates available.
With a secured loan, the vehicle you buy is used as collateral for the loan. The lender has the right to repossess your vehicle if you default on your loan. It will then sell the vehicle to recoup the costs of the loan.
As this type of loan is less of a risk to the lender, the rates for secured loans will usually be lower than those on an unsecured loan. This type of loan is similar to a secured personal loan; however, its intended use is for the purchase of a vehicle.
With unsecured loans, the lender doesn't use any of your assets as security for the loan. This means it has no asset to repossess if you stop making your loan repayments. These loans come with higher interest rates, but you also have more flexibility with the way you use your loan.
Do this before you start looking for a loan or searching for your dream car. Go through your finances, look at your income and outgoings and check the maximum amount you can afford in monthly repayments.
You should also consider the length of the loan term before you start searching around for a lender or a car. The longer the repayment term, the lower the repayments, but the more the loan will cost you overall in interest payments.
You need to think about additional costs associated with buying a new car and determine whether this is something you want to work into the car loan or whether you want to pay for this separately. This includes the cost of insurance, which can be quite high – particularly for younger drivers with less experience.
When most people go hunting for the cheapest loan, they immediately look for a low interest rate car loan and believe they're getting the best car loan. Unfortunately, it is possible for the car loan with the cheapest rate to end up costing you more over the term of the loan if you're not careful.
Consider a car that costs $25,000. One lender is offering a rate of 8% p.a. over 5 years and another is offering a rate of 9% p.a. The only difference is the fees. Take a look at how much it could cost you by just opting for the cheapest car loan rate:
| Lender A | Lender B | |
|---|---|---|
| Loan amount | $25,000 | $25,000 |
| Car loan rates | 8% p.a. | 9% p.a. |
| Loan term | 5 years | 5 years |
| Monthly account fee | $20 | $0 |
| Establishment fee | $0 | $200 |
| Total monthly cost | $532.91 | $518.96 |
| Total repayment amount | $32,275 | $31,588 |
In the above example, the interest rate that was higher turned out to be the cheaper option, despite the initial up-front cost.
Make sure you consider and compare all costs before you apply for a loan and use a car loan repayment calculator to determine your repayments.
If you take the time to compare car loans here on Finder, you'll get an idea of what interest rates are available from a range of lenders, giving you plenty of ammunition when negotiating with your own lender.
If you're keen to stay with your bank or credit union for your car finance, take your interest rate research with you and ask if you can get a discount on the interest rate they offer you.
When you apply for a loan through the finance officer at a car dealership, you have lots of room to negotiate rates. This is because the dealership often receives its loans at discounted rates, and the margin between what the dealer pays to the lender and what you pay to the dealer forms their "trail" commission. In other words, every time you make a payment, some of it goes towards paying interest to the lender, and some goes to paying commission to the car dealership. Haggle: you may save up to 2% off advertised rates.
Some banks will offer a discount on their advertised interest rates if you also have other banking products with them. If you already have a mortgage and credit card with one bank, ask if it will give you a discount on your car loan if you add that to your package?
By reducing your interest rate even a little, you should end up paying less on your monthly payments. This is one of the primary reasons why you should always take the time to check comparison sites before you apply for any type of finance.
Borrowing $5,000 more over a 5-year loan term adds up to $1,000 extra per year you have to pay back, plus interest. This adds up to approximately $90 per month out of your pocket. You can reduce the amount you need to borrow by offering a trade-in of your old vehicle or even paying a slightly larger deposit out of your savings.
If you borrow $30,000 and leave a $10,000 residual balloon payment to be paid at the end of the loan term, your repayments will be calculated based on the $20,000 to be repaid, plus interest on the entire $30,000. You'll need to cover this cost at the end of the term or refinance your car with the lender.
When you choose a longer loan term, the amount you're required to pay each month is reduced. Unfortunately, the lender also gets to charge you interest on your debt for a longer period, so you could end up paying far more in interest over the loan term.
| Option 1 | Option 2 | |
|---|---|---|
| Loan amount | $25,000 | $25,000 |
| Car loan rate | 8.25% p.a. | 8.25% p.a. |
| Loan term | 5 years | 7 years |
| Monthly repayment | $509.91 | $392.78 |
| Total repayment amount | $30,594.38 | $32,993.22 |
In this example, Option 1 has a higher monthly repayment, but you only end up paying $5,594.38 in interest over the term of that loan. By comparison, Option 2 allows you to pay $117.13 less per month on your monthly repayments. This will definitely make budgeting easier throughout the loan term, but you end up paying $7,993.22 in interest over the loan term. This is $2,398.84 more in interest charges you end up paying overall.
Below is a checklist of some of the information and documentation you may need to supply for your car loan application.
*The products compared on this page are chosen from a range of offers available to us and are not representative of all the products available in the market. There is no perfect order or perfect ranking system for the products we list on our Site, so we provide you with the functionality to self-select, re-order and compare products. The initial display order is influenced by a range of factors including conversion rates, product costs and commercial arrangements, so please don't interpret the listing order as an endorsement or recommendation from us. We're happy to provide you with the tools you need to make better decisions, but we'd like you to make your own decisions and compare and assess products based on your own preferences, circumstances and needs.
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